Monetary policy shares something with soap operas: the plot advances slowly until suddenly something crazy happens; like a lost hero’s return from the dead just as his lover is about to marry his best friend, or the Swiss National Bank implements negative interest rates. It’s probably safe to miss a few episodes, but you just never know ...
Any follower of Canadian central banking who skipped the speech last week by Bank of Canada Deputy Governor Timothy Lane missed some important clues in the institution’s thinking. Perhaps the most dramatic was Lane’s endorsement of more aggressive fiscal policy. (I wrote about that at length here.) But Lane also talked about financial stability. Anyone hoping the central bank would make a play for more regulatory powers will be disappointed.
The Bank of Canada and the federal government this year will agree on new marching orders. The inflation target of 2 percent with wiggle room of a percentage point on either side is sacrosanct. But there is debate within the institution on how that goal should be achieved. Governor Stephen Poloz indicated last year that he would like better price gauges than the ones he has now. And policy makers are also putting a fair amount of thought into their proper role in guarding against a financial crisis. There is more work to be done, but the Bank of Canada appears to favour leaving things alone. That would mean the monetary authority would continue to take care of inflation; someone else would be responsible for measures necessary to deflate asset-price bubbles or avoid excessive credit. Economists call it macroprudential policy or regulation.
“Under certain conditions, as long as monetary policy has a larger effect on inflation than it does on financial stability risk and macroprudential policy has a larger effect on financial stability risk than it does on inflation, there would be no need, in theory, for the agencies responsible to coordinate their actions explicitly,” Lane said on Feb. 8 at the HEC Montreal business school. “They would need to share information with each other only so that each could use its own policy tool to account for the spillovers from the other policy on its own objective.”
That’s an argument against following the Bank of England and taking most of what could influence price stability in-house. Lane indicated comfort with the Bank of Canada’s current role in financial regulation. The governor is one voice on the Senior Advisory Committee (SAC), a select group that is led by the top bureaucrat at the finance ministry. (It also includes the banking regulator and the leaders of the agencies that oversee deposit insurance and consumer financial information.) Lane said it is “very important” for there to be a public body with “both the power and the paramount responsibility to use macroprudential tools to promote financial stability.” That body, added Lane, could be a committee, “as is currently the case in Canada.”
A committee, sure; but not the SAC, at least not in its current unaccountable form. The body that Lane put forward as suitable to manage macroprudential policy is too secretive to inspire confidence. (Search on Google for “Senior Advisory Committee” and see what you find.) It emerged after the October election that former prime minister Stephen Harper rejected the Finance Department’s call for new regulatory measures to curb household debt and surging real-estate prices. That was his right. But what of the public’s right to a neutral assessment of the country’s assembled experts on the subject? Paul Jenkins and David Longworth, former members of the Bank of Canada’s governing council, last year called for the creation of a macroprudential body with a similar degree of independence of that cherished by the central bank. The post-election revelations proved their point.
Lane’s speech suggests the Bank of Canada has decided that its main job still should be inflation. That’s fine. But it’s troubling to see a leader of the central bank present the SAC as an effective way to make public policy. Lane stressed that he and his counterparts still are months away from deciding on any adjustments to the Bank of Canada’s mandate. That means there still is time to address Canada’s outdated approach to macroprudential regulation. Stay tuned. These are the days of our lives.