Premiers, finance minister welcome Bank of Canada's interest rate hold

Ben Cousins, BNN Bloomberg

Canadian politicians welcomed the Bank of Canada’s decision to hold interest rates, though one economist was skeptical that calls for a rate pause from a handful of premiers across the political spectrum had a real impact on the policy move.

On Wednesday, the Bank of Canada Governor held its benchmark rate at five per cent, as the bank works towards its goal of bringing inflation down to two per cent. 

The rate hold, which was in line with most economists’ expectations, came after premiers of three provinces made the unusual decision to call for a pause to interest rate hikes, which they argued has been putting a squeeze on their constituents. 

Newfoundland and Labrador Premier Andrew Furey was the third Canadian premier to call for a rate pause, following similar appeals Ontario’s Doug Ford and B.C.’s David Eby – the three politicians representing Liberal, Progressive Conservative and New Democratic governments, respectively.

Furey issued a letter on Tuesday citing the “negative impacts continued interest rate increases are having on Canadians.” 

Speaking to reporters following the Bank of Canada announcement, Furey called the hold “great news for Newfoundlanders and Labradorians.” 

“On the balance of the day-to-day impacts and rightfully pursuing escalating inflation rates, this is the right move in my opinion right now and I applaud the Bank of Canada for their decision,” he said.  

Ford, who had also written to Macklem to ask for a rate pause, called the announcement from the central bank “good” in a Tweet posted Wednesday. Earlier in the week, Ford he had written to Macklem highlighting the “devastating impact” rate hikes have had on people.

Federal Finance Minister Chrystia Freeland also weighed in on Wednesday, calling the pause “welcome relief.”

“As the Bank continues this work, my number one priority is to use all the tools at my disposal and to work with partners at other levels of government across Canada, to ensure that interest rates can come down as soon as possible,” Freeland wrote in a statement. 

BNNBloomberg.ca has reached out to Eby’s office for comment. The B.C. premier was the first to ask the central bank to hold rates last week, saying that people in his province were “already hurting.” 

POLITICAL THEATRE

David Doyle, head of economics Macquarie, said he doesn’t believe political pressure on the Bank of Canada impacted its policy decision. 

“It doesn’t surprise me to see the political theatre take place. I think that politicians are inclined to grandstand in that way,” he told BNN Bloomberg in a television interview on Wednesday.

“The Bank of Canada remains independent. I don’t think what the premiers or the finance minister are saying will have much effect at all what Governor (Tiff) Macklem is inclined to do.” 

With files from Bloomberg News 

 

Politician appeals to BOC on rate hikes 'unfortunate,' policy prof says

Nojoud Al Mallees, The Canadian Press

Two premiers have sent letters to Bank of Canada governor Tiff Macklem urging against another rate hike, as the provincial leaders attempt to sway the central bank's interest rate decision slated for Wednesday.

Ontario Premier Doug Ford sent a letter on Sunday saying families and businesses cannot afford the "crushing impact of further rate hikes," echoing a letter British Columbia Premier David Eby sent on Thursday. 

Associate professor and founding director of McGill University's Max Bell School of Public Policy, Christopher Ragan says it's "unfortunate" that the premiers felt that sending these letters was useful. 

"It's pretty easy to find people that will argue that the (central) bank shouldn't raise interest rates anymore," Ragan said.

But having premiers send letters to the governor "invariably brings in a political element" to the debate, he said. 

The Bank of Canada is an independent institution that receives its mandate from the federal government and is responsible for maintaining a two per cent inflation target. 

However, the central bank has been no stranger to political pressure and critiques over the last couple of years as it has navigated a tumultuous economic period marred by a pandemic-induced downturn followed by runaway inflation. 

With inflation still above two per cent, monetary policy expert Jeremy Kronick said the central bank is required to carry out its mandate. 

"They don't control the mandate: the mandate is set by an agreement between them and federal government. And so for them, they have to continue to do what they think is best to get inflation back down to two per cent," said Kronick, who heads financial and monetary policy research at the C.D. Howe Institute. 

The letters from the premiers come as forecasters widely anticipate the central bank to hold its key interest rate steady as the economy begins to buckle under the weight of higher interest rates. 

The Bank of Canada is not commenting on the letters Macklem has received due to a communications 'blackout' period it observes ahead of interest rate announcements.

The central bank has aggressively raised interest rates since March 2022 to clamp down on decades-high inflation, including raises at its last two meetings in June and July in response to a hot economy.

But over the summer, more signs have emerged that the economy is actually slowing down: the unemployment rate has been on the rise and real gross domestic product unexpectedly contracted in the second quarter.

These signs have convinced most forecasters that the central bank will stay on the sidelines this week, holding its key interest rate at 5.0 per cent — the highest it's been since 2001. 

The central bank has faced opposition for its rate hikes from labour groups and some policy thinkers who argue that the suffering the rate hikes will cause workers exceeds the benefits.

Politicians have also weighed in on the Bank of Canada's operations over the last couple of years. Conservative Leader Pierre Poilievre has attacked the Bank of Canada for its policy response to the COVID-19 pandemic and vowed to fire Macklem if his party forms government.

Meanwhile, NDP Leader Jagmeet Singh has argued the Bank of Canada's approach to inflation is "wrong," calling its key interest rate a "blunt" instrument. 

The political critiques have raised concerns about interference into the Bank of Canada and questions about how elected officials should approach discussing the central bank's policies. 

Ragan said monetary policy shouldn't be protected from the type of criticism other policies face, but history shows that central banks that are not independent from government are more likely to make policy choices that fuel inflation.

Instead of debating its day-to-day operations, Ragan said elected officials should focus on debating what the Bank of Canada's mandate should be. 

The central bank's mandate dictates what the target inflation rate should be, for example, and could stipulate other priorities for the institution.

"I think that is a very important place where government, elected officials get involved. But then once you've established what the mandate is, I think there's a real advantage in just letting the central bank do its job," he said. 

This report by The Canadian Press was first published Sept. 5, 2023.