The Conservative leadership campaign caused consternation by calling for the Governor of the Bank of Canada, Tiff Macklem, be fired – creating outrage in the political and media commentariat. Yet, at a time when all sorts of institutions are being called into question, it is curious that the Bank should be deemed immune to such ire, particularly given its dismal performance in its primary task: controlling and minimizing inflation. Normally, when any organization has failed, scrutiny and even ouster of its leader would be very much near the top of any remedial action.
The functions of Canada’s central bank are: controlling the money supply; be the lender of last resort; the government’s fiscal agent; and financial system supervision. Its main task is safeguarding the value of Canada’s currency; i.e., prevent high or rapidly rising inflation; or, atypically, deflation. The Bank has three weapons: bank reserve requirements; open market operations – buying or selling securities; and setting short-term interest rates.
The Bank can also influence markets by making its goal or goals known, to heed by financial players, by practicing ‘moral suasion’ (forward guidance). This is normally conveyed by the Bank by making its policy inclination public. This approach allows others to preemptively advance changes in the Bank’s policy, avoiding panicky surprises in financial markets (which could lead to volatility in stock and bond markets).
Yet, the B of C has done a poor job in one of its prime missions: keeping inflation around 2%, and from escalating to harmful levels. Canada’s Consumer Price Index went from 1.1% in February, 2021 to 7.6% in August, 2022. The Bank’s own data show that the money supply, as defined by M1 (which is currency in circulation plus chequing accounts at financial institutions) grew at an annual rate of 30% by December, 2020. Soon after, inflation began rising, accelerating throughout last year and into this.
While there is not a direct linear correlation with money supply growth and inflation, there is a general relation. Rapid issuance of currency has resulted in high and rapidly escalating inflation in some less developed nations. This has caused a national government effectively funding much, if not all, of its spending by issuing more money – these days, conveniently electronically, not printing.
‘Quantitative easing’, intended to give both governments and their central banks almost-plausible deniability, employs government debt purchases by the central bank, creating money to buy bonds, notes, and bills. While money can be absorbed in a depression-like market plunge, such as the panic of March-April 2020, the B of C kept going. (Any economist, and the Bank is ‘stuffed’ with them, claiming it is a mystery how vast new liquidity causes inflation is either incompetent or disingenuous.)
If Canada’s B of C is to remain an intact institution, its independence and competence must be guaranteed and safeguarded through an inquiry – that, to determine what went wrong, and how future blunders can be avoided in future.
Canada’s B of C did not exist until 1934. Central banks, either as a concept or an institution, have no guarantee of perpetual existence than anything else. They are not immune from analysis, constructive criticism, and potential restructuring or repurposing – even elimination.
The future will not resemble today’s world exactly, anymore than the past does, and will not contain everything that exists today. Central banks are not sacrosanct.
Ian Madsen is the Senior Policy Analyst at the Frontier Centre for Public Policy