Balancing the Bank of Canada’s Independence and Accountability Bill
Bill to Amend--Second Reading--Debate Adjourned
September 26, 2023
Moved second reading of Bill S-275, An Act to amend the Bank of Canada Act (mandate, monetary policy governance and accountability).
She said: Honourable senators, I want to begin by acknowledging that the lands on which we are gathered are part of the unceded traditional territory of the Anishinaabe Algonquin people.
On August 31, the premiers of British Columbia, Ontario and Newfoundland and Labrador asked the Governor of the Bank of Canada to stop raising the key interest rate and consider the human impact of its monetary policy. Some commentators challenged those remarks and felt that the provinces were attempting to engage in political interference with the Governor of the Bank of Canada.
Personally, I saw those remarks more as an expression of the deep economic insecurity felt by the people in those provinces and echoed by the provincial premiers.
We all want to live in a country where our governments work to ensure our basic physical and economic security. Economic security alone can’t buy happiness, but family life is certainly happier and more optimistic when we can plan our income and expenses and pay the mortgage or rent without having to cut back on food or our children’s education. That has been my main motivator throughout my career: combatting economic insecurity and promoting ways of achieving it. That is what sparked my interest in the labour market, social dialogue and monetary policy.
Are you wondering what this anecdote has to do with my bill? It’s quite simple. A country’s prosperity depends in large part on the quality of its human and natural resources, and on its collective ability to develop them.
Monetary policy largely determines the basic cost of investment or development of our human and natural resources. Monetary policy therefore has a major role to play in promoting a country’s lasting prosperity, a basic condition for a nation’s economic security. Monetary policy is a serious and delicate issue, one that deserves particular attention, because a country’s standard of living largely depends on it.
For that reason, no one person, even surrounded by an excellent team, can be asked to take full responsibility for it and assume the consequences.
Colleagues, in the speech that follows, I’ll explain first in French and then in English the nature of my bill and the main principles behind it. I hope you’ll understand why it’s important to move it quickly through to committee.
I hope to see you take part in this second reading debate by asking me questions. My formal speech will be relatively brief.
What is the purpose of my bill, summed up in one sentence? It aims to strike a better balance between the Bank of Canada’s independence and the need for transparency and accountability.
To that end, it amends the Bank of Canada Act by adding a section on monetary policy, a mandate and objectives. This bill seeks to fill an existential void in the existing legislation, which is utterly silent on monetary policy and does not specify the objectives of such a policy.
This bill helps to bring the Bank of Canada’s legal framework into line with those of comparable central banks. The bank was established in 1935, and its preamble, which serves as its mandate, has not been rewritten since, even though the act was amended in 1985. This bill does not change the spirit of the objectives set out in the 1935 preamble. It simply expresses the bank’s mandate clearly and in contemporary language.
Bill S-275 also seeks to recognize the bank’s institutional independence while adding transparency and accountability requirements and safeguards. That relieves the governor of part of the decision-making burden. Believe it or not, the governor is currently the only person deciding the fate of millions of families, although he works with his governing council, of course. My bill will also strengthen public confidence in the bank’s decisions.
To that end, my bill creates a permanent committee on monetary policy. This committee will be chaired by the governor and will include deputy governors and experts not affiliated with the central bank. This good governance practice exists in several other countries, including New Zealand, England and, to an extent, the United States. Australia is also considering this approach.
This committee of experts from different backgrounds will provide assurances to the public that monetary policy is determined independently and is not subject to partisan political influences. The committee will also be responsible for supervising the cost-benefit analysis of the monetary policy and the assessment of its effectiveness. There is currently no regular analysis of the monetary policy’s effects. Unlike in other countries, the bank itself analyzes or assesses the monetary policy.
The committee will also take part in drafting the five-year agreement between the bank and the government to set the monetary policy framework. This committee could also propose alternative strategies as buffers against such supply-side shocks as unpredictable spikes in oil prices or adverse weather conditions leading to crop failures.
This expert committee will reassure Canadians that the bank is fulfilling its role of promoting economic prosperity. It goes without saying that the composition of the external members of the permanent committee is of the utmost importance. That is why Bill S-275 sets out specific eligibility conditions and skill requirements. The appointment process will also have to be open and transparent, and the members will have to be selected after consultations with key players in the economy, including representatives from major employer and labour organizations. It is essential that these experts, who do not necessarily work within these organizations but are recognized by them, come from diverse backgrounds. We don’t want experts who all went to the same school and don’t have field experience.
As you know, Canadians and the financial markets are often nervous on the day the Governor of the Bank of Canada announces the key interest rate. It is not surprising given the financial consequences for people’s wallets and the impact of this decision on the economy. Besides, most Canadians don’t really know how this decision is made.
Technically, the Governor of the Bank of Canada determines the key interest rate eight times a year in the context of its monetary policy. He is supported by his Governing Council, made up of deputy governors whom he has chosen and who work for the bank. In recent months, an external, non-executive deputy governor has joined the committee.
The governor and his team could get it wrong, and the Bank Act is of no assistance or protection.
The Bank of Canada Act was adopted in 1935. The act was amended through time and revised in 1985, but the objectives of the bank and the mandate of monetary policy were never specified in the act. It is completely absent.
The preamble to the Bank Act presents a list of objectives of equal importance. The bank, on its website, summarizes this preamble as the bank has the mandate, “. . . to promote the economic and financial welfare of Canada.” To this effect, section 8 of the act gives the governor full powers to act as he sees fit, without any transparency requirements.
However, since 1991 — more than 30 years — the monetary policy framework is specified in a five-year agreement prepared by the bank and agreed to with the government through the Minister of Finance. This framework determines the target in terms of inflation rate without specifying the timeframe for achieving it. For the last 30 years, and renewed in December 2021, this agreement has targeted a 2% year-on-year increase in the overall consumer price index.
This agreement is tabled in Parliament, but is not subject to any parliamentary approval or accountability. This document — which has no legal force, because it’s not in the law — allows the governor to raise the base interest rate if and when the overall CPI increases by more than 2%. This is a simple rule for a problem that is not, and it is a rule that has been created through time and never had any foundation in the Bank of Canada Act.
Honourable senators, as you know, inflation in the 21st century has become a more complex issue than in the previous one. It is not always an excess demand problem. Climate crisis, political uncertainty, reversed globalization, demographic issues, all may create supply shocks that will impact inflation. Rising interest rates reduce aggregate demand with certainty. But Canadians don’t have the same assurance that rising interest rates will cope with inflation because as you know, increased interest rates can have boomerang effects. When the Bank of Canada raises its basic rate, increases to mortgage rates follow.
According to Statistics Canada — and that’s a really important statistic — mortgage cost increases are responsible for more than 30% of the yearly cost of living increases. It’s 37% with rental living increases. It can also have detrimental effects on specific sectors such as housing, for example. When housing spaces are in short supply and construction starts decrease because of less affordable mortgage conditions, rental rates go up. The two together are around 37% of the increase in the CPI that can be attributed to the monetary policy.
It is hard to predict the consequences of monetary policy on the economy because it reacts with lags. The bank can easily be too severe or too loose, and it is easy to overshoot monetary policy and precipitate a recession.
Therefore, some countries have incorporated safeguards into their legislation. For example, in the U.S., Australia and New Zealand, monetary policy pursues a dual mandate, that is, price stability and maximum employment or full employment. Consequently, this dual mandate forces central banks to be prudent in the conduct of monetary policy.
Some countries have also put in place monetary policy committees where external members can help assess the risks involved and work on diverse scenarios.
If supply chain shocks are to become common, shouldn’t monetary policy consider the expertise of experts knowledgeable about those realities?
This bill adds safeguards in the conduct of monetary policy by specifying the dual mandate of monetary policy and by creating a monetary policy committee called the permanent committee. The composition of this committee and the process of selection of its members are of the utmost importance. The process needs to be open and transparent. These experts should be appointed after consultation, as I said previously, with organizations representing civil society and the economy, such as important business associations and labour organizations, so that the committee is best equipped to balance the goals of price stability and full employment. This committee would be credible to call for responsible behaviours from all economic actors.
The committee would participate in the discussion about setting the policy rate. When I say “the committee,” I mean the big committee chaired by the governor, with the deputy governor and the external experts. They would participate and vote on setting the policy rate, as they do elsewhere. The members would adopt the annual cost-benefit analysis framework that supports policy; supervise the assessment of the effectiveness of monetary policy — because we can, as I said, question the link between increasing interest rates and taming inflation — ensure that the use of non-traditional tools is consistent with the bank’s mandate; and participate in the drafting of the five-year agreement with Canada.
Last but not least, I have to say that some parts of this bill have been inspired by the work done by a special committee appointed by the government of Australia to review the Reserve Bank of Australia Act. This report is entitled An RBA fit for the future. It was published in March 2023.
When I read this report, I said that’s a gift from I don’t know whom that gave me the legitimacy to pursue what I wanted to do, which is to introduce an amendment to the Bank of Canada Act so that it is modernized. But do you know who was on the committee that wrote this? Three experts worked together on the report, and it benefited from the experience of a former deputy governor of the Bank of Canada. Guess who? It was Carolyn Wilkins. It’s very interesting, so I was inspired by the recommendation of this report to draft this bill.
The time has come, colleagues, to demand greater transparency on the real impact of short- and medium-term monetary policy on the Canadian economy and to give the governor and his team the tools to achieve its main objective, because the main objective of the Bank of Canada is prosperity. It is not price stability at all costs.
When I realized that, I said this is how I have to talk about that. The governor and his team have powers to do anything they want to promote prosperity. Nowhere in the Bank of Canada Act is it underlined that price stability is to be the sole objective. It cannot be the sole objective. Because of that, I think it is very important to think about that and to put in place the institutional change in the act to balance the independence of the bank and the accountability principle. By having this external committee, which would have the right to speak outside of the bank, it creates confidence in the population that the bank is doing the right thing.
I’m finished with my speech. I can take questions, if you want. I would be pleased to answer them. Thank you very much.
I’m happy to oblige, Senator Bellemare. Thank you for your speech.
To what extent would you make the deliberations of this proposed monetary policy committee public, particularly the minutes of their meetings and the detailed discussions that reveal the thinking of the members? As you know, in the Federal Reserve System there’s always a lot of speculation about the different governors of the Federal Reserve System and the positions they take. I’m not sure how beneficial that is and how much more transparent that makes the American system. What is your proposal for this approach that you’re suggesting?
Thank you for the question, senator.
I’ll answer in French if I may.
I’m not sure the monetary policy committee should be televised, but it will produce a report, just like the one in New Zealand. I really like the New Zealand committee’s report, because it specifies who said what, which makes the outcome of the vote clearer.
In Western Canada, the C.D. Howe Institute created its own version of a monetary policy committee consisting of about 12 experts who discuss what they would do and then vote. Every member’s name is associated with their views. That beauty of that is that it results in a moderate, prudent monetary policy.
Senators may not be aware that, in the 1980s, when interest rates were very high, Canada had one of the most restrictive monetary policies in the world. Right now, given the current rate of inflation, Canada’s monetary policy is very restrictive. Leaving out the effects of mortgage rates and rent, we’re not far from our 2.6% target.
There was a time when the inflation rate target was between 1% and 3%, with some flexibility. Right now, the combination of a restrictive environment and rapid interest rate hikes means that many investments are not being made. We are not accelerating our transition to a green economy.
We can’t get that time back. We can’t get that lost prosperity back. We can’t make up for investments that weren’t made. That’s why the members of the Standing Senate Committee on Banking, Commerce and the Economy found that Canada’s per capita GDP wasn’t really up compared to other countries.
I know this is a difficult subject, but my bill has no financial implications because these experts will not be paid.
When I was appointed to the Economic Council of Canada, I was not paid. I did that work for six years. It took up a lot of my time, but I was very happy to be a member. In this case, I think there will be a lot of experts from different backgrounds and it won’t turn into a free-for-all — Earlier, I gave an interview on the radio and I was asked, “Don’t you think there will be bickering?” I said, “No, there will be votes and a result.”
I want to commend my colleague, Senator Bellemare, for her work on this bill. I know how motivated you are to protect the Bank of Canada’s independence and transparency. You know that I share your objectives. However, I’m wondering about the timing of your bill. Right now, every five years, the Department of Finance and the Bank of Canada sit down to review the bank’s mandate. Thanks to your intervention two years ago, which I applaud you for, the job market is briefly mentioned, not as much as you would have liked, but still.
Right now, the Bank of Canada is acting like a firefighter, as are many other central banks, to beat inflation, because the causes aren’t necessarily attributable to it. Don’t you think that launching a debate and sparking discussions in this regard at this stage — at a time when political leaders are prepared to show the current governor the door and when we are fighting hard against inflation, which is a major scourge affecting the most disadvantaged members of our society — rather than waiting three years might upset the financial markets? It will become political, and the independence of the Bank of Canada, which you and I both hold dear, will be called into question. The whole discussion surrounding the Bank of Canada will become political and politicized.
In your bill, you appoint six external members. As a result, the governor of the Bank of Canada and his two colleagues will be in the minority around the table. Since each member has an equal vote, only one third of the votes will go to the head of the Bank of Canada as opposed to the other six volunteers. Who will be flying the plane? Who will be accountable for the interest rate decisions that affect Canadians?
Thank you, Senator Gignac. I understand your concern. You asked two questions. I think it’s too late to wait to better define the monetary policy framework. There are too many things to do. With that in mind, I think that the Senate is the best institution to begin wisely and carefully considering this issue. If we analyze a bill like this one, there is a lot less risk of things getting out of control than if we just asked the question more broadly. That is why I decided to choose specific aspects of the legislation to amend, to prevent a populist uprising or something of the sort. Australia has set up a panel of experts to make changes as part of a strict framework.
Your second question about the number of members on the monetary policy committee is a good one. I am open to discussion on that. This is the beginning of a negotiation. Perhaps the number is too high. Perhaps we should increase the number of deputy governors, or keep the number of deputy governors the way it is and have the six — I based the committee on the Australian model, but we could keep the six and add six or perhaps . . . In any case, that is something that could be considered in committee, to see what we come up with.
I am not worried about that. On the contrary, it may help us with our investments in the future.
I have a question for you, senator. I am not an expert in monetary policy, but you made several references to the Australian example. These days, Australia is referred to for all sorts of examples. In this case, did having a mandate that you consider to be more balanced between prosperity and the fight against inflation have a measurable impact on monetary policy? For example, is Australia less likely than Canada to deal with inflation by raising interest rates? Is it possible to see whether this model has already had an impact?
Thank you for that excellent question, senator. Unfortunately, I can’t say whether there’s been any impact in Australia.
What I can tell you, however, is that in the United States, there has obviously been an impact. The United States also has a dual mandate, specifically price stability and full employment. Pierre Fortin has been working on this issue, and I had the honour and opportunity to speak with Janet Yellen, who was chair of the Federal Reserve Board just before being appointed Treasury Secretary by President Biden. She told me this could explain why the unemployment rate was often much higher in Canada than in the United States in the 1980s and 1990s.
I examined this issue in a book I published, but it hasn’t been updated for the 1980s and 1990s. It’s clear that Canada didn’t increase its productivity as much as it could have, because of its strict monetary policy, but I didn’t do that kind of regression analysis. I compared the statistics for countries with dual mandates, and I studied the matter of Canada’s stringency. As for Australia, I can’t answer your question. Thank you.
Senator Bellemare, thank you again for sparking our imagination and prompting discussion about the Bank of Canada. You’ll recall that a few months ago, when the Governor of the Bank of Canada appeared before our committee, I asked him who he was consulting. He replied that he was consulting several Crown corporations and interdepartmental committees to gather as much information as possible.
Given the evolving nature of the economy, whether because of the pandemic, supply chains or the environment, do you think it’s a good idea for this advisory committee to be a permanent committee? Shouldn’t it instead be made up of ad hoc members, so as to capitalize on experts in whatever field the geopolitical or economic situation calls for?
Thank you for the question. I think that this should be a permanent committee whose members serve a renewable three-year term so they have time to really get into the files. The bill states that the chosen experts must be able to demonstrate outstanding expertise in two of the five following areas: the labour market, open-economy macroeconomics, supply chains, the financial system and risk management. These are important areas of expertise from different backgrounds.
Let’s get back to transparency. In your question, the governor relies, as he said, on core inflation, a statistic whose accuracy is unknown. We’ve been told that this is a metric calculated by stripping out the most volatile components of the consumer price index, but what exactly is core inflation?
These are questions that a permanent committee could study and then explain to people, and this would build confidence around what the bank is doing.
I don’t want to take up too much time here, since we’ll have a chance to talk about this some more. Senator Bellemare, I’d like to talk more about transparency. I find your approach to the Bank of Canada’s transparency a bit hardline. Sometimes there’s a difference between governance and transparency. In terms of governance, obviously it’s up to us as legislators and to the Department of Finance to determine the Bank of Canada’s mandate.
Regarding transparency, having spent decades running the show as a chief economist, I personally observed the evolution of transparency at the Bank of Canada. Nowadays, monetary policy reports come out every three months, and we even get things like meeting minutes. Even the International Monetary Fund said, last September, that the Bank of Canada sets a high benchmark for transparency and that its practices are broadly aligned with expanded and comprehensive practices as defined by the Central Bank Transparency Code.
Apart from the fact that the people at the table will disclose how they are voting, how will her permanent committee on monetary policy make everything more transparent than it is now? Senators will understand that a report on monetary policy is already published every three months and that there are speeches by the governor who comes to testify before the Standing Senate Committee on Banking. He also does the same in the House of Commons. Other than having external people who will disclose how they are voting, a bit like the federal reserve does right now, what more does your bill on the Bank of Canada’s transparency do?
Thank you very much for your question. In fact, the International Monetary Fund has been publishing a very rigorous transparency code since 2020. The IMF has analyzed the Bank of Canada, and in its report, especially at the beginning, it applauds the bank — Yes, the bank is making efforts to communicate better. It communicates quite a bit with Canada and is transparent about its objectives. However, the International Monetary Fund also acknowledges that the bank could be more transparent in analyzing the results of its policy and in monitoring indicators.
That’s where I stand. I believe that monetary policy is not a one-size-fits-all relationship between interest rates and inflation. There is a whole range of opportunities and combinations, and there is also a set of strategies that could be adopted. I think it would be useful, even for the Bank of Canada, to measure the costs and benefits of its choices, to determine the financial impact on families and businesses, and to understand the consequences of all these decisions on investment and, ultimately, on productivity.
That’s where I’m at. I think the governor and his team are doing an incredible job of communicating. We see them everywhere, giving talks, producing documents. Do we know if the policy will really work, though? Doubts are setting in. I myself have doubts, but I don’t want to get into that because that’s not the purpose of my bill. The purpose of my bill is to make room for doubt and urge prudence.
I think doing this is in Canada’s interest. Canada is a great country, but it’s behind the times in many ways. Monetary policy is key to the country’s prosperity. We can’t let interest rates fluctuate wildly, just like people can’t take a small amount of blood pressure medication one day and a large amount the next. We have to be prudent.
That’s what the committee’s job would be. I wonder how people at the bank get any sleep the night before a policy rate announcement. I wouldn’t be able to sleep. As an economist who knows how the policy rate affects everyone’s lives, I think it’s far too great a responsibility to leave to one person. I think that a well-balanced committee would help a lot. It wouldn’t fix everything, but it would help.
Thank you, Senator Bellemare, for your speech and your bill.
Global concerns on central bank independence are mounting. Do you not see a larger risk for independence and a resulting blur between fiscal and monetary policy through your proposal?
I will try to respond in English. In my proposal, there is space to enable coordination of fiscal and monetary policy. Like it or not, monetary policy has an impact on fiscal policy because it increases debt service, and fiscal policy has an impact on the monetary side of the equation as well.
If you have an expert on your monetary policy committee, with observation from the Deputy Minister of Finance, you could have great coordination of fiscal and monetary policy to curb inflation while being completely independent from partisan politics. We say the bank has to be independent; independent of what? It has to be independent of the political parties in power so it doesn’t act in a partisan manner.
If you have a committee on monetary policy, you have more reason to expect independence than none. It increases the independence of the bank while multiplying the choices of policy decision. It’s an innovation in social engineering or economic engineering in a country that really needs some innovation.
