Here’s how report on business columnist Dave Parkinson wants you to understand the Bank of Canada Central Banking is like Plumbing when it’s working we give it no thought whatsoever it’s just there but here’s the thing lately our plumbing has been kind of leaky inflation is still high in fact
New numbers out Tuesday put it at 3.8% still nearly double the bank of Canada’s Target of 2% so now we’re thinking about how do we fix this what’s wrong with this why isn’t it working calling people yelling at people because we don’t get it and that’s why we don’t
Get it because when it works we never think about it the fix for these leaks according to the Bank of Canada is to raise interest rates they’re currently at 5% and we’re expecting another decision on them next week so uh you know the plumbers are working hard and we’re standing over them wondering
Why it’s costing us so much today we’re going to talk to Dave about the plumbing of Canada’s economy so we can really understand how it works what people’s concerns are and what can be done about it all I’m Mana Carman Wilms and this is the decel from the globe in
Mail Dave thanks so much for joining me well thanks for having me so Dave Canadians have been of course feeling the impact of interest rates um and probably as a result a lot of people now have opinions about the Bank of Canada and what it’s doing right uh but but
When it comes down to it people are really feeling the strain so is everything as bad as it can sometimes seem it depends on who you are increasing interest rates falling interest rates they apply across the entire economy but they don’t affect individual households individual businesses the same way so what they’re
Seeing is they kind of expected that it would hit the poorest people in the economy the lowest income people the hardest MH um but what they’ve also found is that actually some of the those same pressures have actually been helping some of the lowest income people
In the country in that you know the inflationary pressures have been tied very closely to a very strong labor market which has been helping people at the bottom end of the labor market it’s been improving job availability and it’s been improving wages in a way that we
Haven’t seen probably in a generation in fact disposable income has actually gone up so in a weird way though that that’s helpful for people in low incomes because their wages are going up but unhelpful to the Bank of Canada because it’s trying to slow down consumption and
It’s actually seeing a little more of consumption than it maybe had expected to see from some of the people that expected would get hit hardest so it sounds like this is both helping and hurting kind of the the the Canadians with the lowest income there’s two sides
And it’s going to and again it’s going to depend a lot on how much debt do you carry the PE people who carry a lot of debt get hit harder um it turns out that the people who are being hit the hardest in terms of their debt to disposable
Income ratios which is a really good way of measuring how severe your uh your debt load is the people who are getting hit hit the hardest are sort of the middle of the age range kind of 35 to 55 because those are the people who hold the bulk of the mortgages ah yes
Strangely though people younger than that sort of the 20 to 35 they’re actually doing better in terms of their debt loads and we can only theorize on this but it seems like what’s probably happening is that they’re just not buying houses because it’s just it’s become to expensive the mortgage rates
Are too high they’re holding off being in the market that’s actually giving them a little bit more flexibility in terms of disposable income so again the bank is trying to gauge where these pressures are landing and whether they’re actually having the desired effect that’s the plumbing right that’s
This is the plumbing within this whole process okay and and when we’re talking about interest rates I think it’s fair to say honestly that you know we people are paying attention to it now but I think there’s a lot of public confusion really about how these rate hikes
Actually get made right so so so Dave I guess what’s the number one thing that uh some people get wrong about the these rate Heights and and the Bank of Canada that’s making them well the big thing and there was there was a survey that came out from Abacus data uh couple of
Months ago and uh it was quite a broad survey it was about 2,000 people so it was a pretty large sampling of of Canadian opinion and and it found that nearly half of Canadians believe that either the the federal government tells the Bank of Canada where to set interest
Rates or that the federal government sets the rates themselves both of which are wrong some of this probably political rhetoric has probably um contributed to this because there’s a belief that you know Justin Trudeau is the reason we have high interest rates so then in people’s minds it’s the
Government has been raising interest rates but it’s not the government the Central Bank operates independently from the from from the politics of the federal government okay so so let’s actually get into this then what exactly is is the relationship between the Bank of Canada and the federal government it
Is uh it’s very much an arms length relationship um the Bank of Canada is a federal government agency it’s owned by the government what the government does is it appoints a a governor it does that once every seven years it appoints the senior Deputy Governor which there’s a
Little more flexibility in there but it’s also a seven-year term sometimes they overlap a little bit but again the two top officials of the bank are in fact appointed directly by the Prime Minister the Finance Minister okay there is a five year agreement between the government through the Department of
Finance and the Bank of Canada on what it is that the bank is mandated to do the Mandate is aim for 2% inflation okay and that has been the case for about 30 years and once that mandate is set the government steps back and says you
Figure out how to do it that’s your job we don’t step in we don’t interfere we don’t tell you how to do it when to do it why to do it we have convers ation every once in a while we get on the phone we have lunch I mean almost
Literally but that’s that’s about it it it tends to be sort of big picture um Economic Policy kinds of conversations that they have not specifics of you should raise rates now you should lower rates now it’s it’s helpful for the government to know what the bank is
Thinking it’s helpful for the bank to know what the government is thinking in terms of its fiscal policy its spending plans its taxation plans because all of this stuff interacts obviously economically sure but they don’t they are very careful not to tell each other
What to do so who else makes up the Bank of Canada because you mentioned Dave that the Prime Minister appoints the Bank of Canada Governor but I guess who else is in charge at the Bank of Canada and who’s hiring them officially our interest rates are set by the governor
Of the Bank of Canada in the bank in the Bank of Canada Act which goes back about 90 years that’s the Governor’s job alone um but outside of that sort of legal framework by by the bank standard practice for about well since the 1990s has been that the go What’s called the
Governing Council which is the governor and all of his Deputy Governors there’s a total of six of them at the moment they are a body that work together um on a consensus basis to to make interest rate decision sometimes they bring in people from the outside there is
Currently a sort of a new twist that the the bank introduced this year which is to have an independent member of the governing Council who has had no previous connection with the bank and is is considered completely an outsider from from the the banks sort of long-standing uh um group that that
Works together to form to form the policy so they they brought in somebody as a sort of a sort of an independent voice on the on the panel is that was that the motivation behind that change to get I guess get a different perspective yeah yeah and it’s h you
Know it’s it’s one of the things that a lot of central banks in the world have been increasingly doing is trying to trying to broaden the base of their decision making and uh I mean this is obviously one of the things that that people have become concerned about because now that they’re actually
Looking at this process they’re asking themselves well who are these people who are making the decisions and and who voted for them well the answer is that nobody voted for them then then the question becomes well why why this group of people and not some other group of
People um I want to go back to something you mentioned a bit earlier Dave you you said that the bank was set up to be independent uh why that why was the bank set up to be independent in the first place well I guess the answer to that is
Look at the places in the world where central banks have not operated independently and it tends to go very badly when politics interfere with monetary policy tough decisions are either not made at all or made very badly one example of the danger was uh during Donald Trump’s Administration
When he he would actively criticize the head of the Federal Reserve he wasn’t directing them on what to do but he was strongly suggesting that that he he wanted a certain interest rate policy that wasn’t consistent with what the head of of the FED wanted to do and and
Of course the Federal Reserve is the the Central Bank in in the states yeah but at any rate the big concern at the time was that Donald Trump would in fact interfere and direct the bank to uh to lower rates even though it was counter to any logical economic sense but his
Concern was to maximize economic growth to maximize profits to maximize returns in the stock market these are not the goals of monetary policy monetary policy is meant to be a stabilizer yeah so you don’t necessarily want a politician who’s maybe thinking about the voting public to be making these decisions well
I mean I and you put yourself in the situation we’re in right now and how many vot votes could you get if you said if you elect me tomorrow I will cut interest rates by two percentage points you you could do very well yeah would it be good policy no it’d be horrible
Policy you’d end up with a much bigger economic problem than we have right now yeah can you just spell this out for us Dave I mean you’re thinking about this all the time but for people who are not as well-versed what would be the danger of just slashing interest rates to like
2% overnight if you cut interest rates what you would do is actually stimulate more demand we’ve already got too much demand if you think we have an inflation problem now cutting interest rates by two or three percentage points overnight would cause a tremendous inflation problem we’ll be right back after this
Message so to recap a little bit there’s Bank of Canada it’s got a governor that person is appointed by the federal government uh but the bank is independent from the federal government in terms of the decision it makes to raise or lower interest rates is the big
One right so I guess what do we know Dave about how those decisions are made when it comes to setting interest rates we do know that the governing Council gets together every six or seven weeks we know generally how the process works we don’t know specifically what is said
In the room we know that when they come out of the room they announce their decision they provide a short explanation of what their decision is but we don’t always know how they come to the decision then we don’t always know how they come to the decision we
Know more now than we used to the bank has been getting better and better at being being transparent But ultimately we don’t know what those what each of those six people who make that decision we don’t know their specific individual opinions we don’t know what objections
Some of them may have raised in great detail or who raised them we don’t know how unanimous the decision is officially it was by consensus but we don’t know how unanimous it was there could be a couple of outliers who get talked into
It in a in a meeting but we have no way of knowing that do we have any idea of the the things they consider though at least when they’re talking about the bank as of this year has been publishing what they call a summary of deliberations now this was a long time
Coming and the bank actually resisted it for a long time they wanted their conversations to be entirely confidential and so so that the people in the room would feel I guess free have to say whatever they wanted to say to whomever they wanted to say it within
The walls of of that meeting so now what they’ve done is they’ve come out with something that is not does not quite tell you who said what but it is a summary of the conversation that they had in those meetings leading up to the decision okay so transparency is one of
The criticisms there it sounds like they’re trying to do a little bit to alleviate that um but are there any other common critiques I guess Dave of the bank well and I think that’s probably the biggest one is that it’s uh it’s a black box and again this is an
Extremely powerful group being the governor of the Bank of Canada is maybe the single most powerful economic position in the country unelected it’s just it’s a natural crit criticism of why does somebody with so much power is not really answerable to anybody yeah so that’s like I guess a question of
Accountability right there then yeah and I think there is I think there is accountability but it’s it’s informal it’s not and it’s not frequent Governors do go on a regular basis and speak to parliamentary committees both both in the Senate and in the House of Commons um it’s regularly scheduled it happens
Multiple times a year it’s not as if that there is no political oversight of this group I would say that having listened to these testimonies many times in the past they’re not particularly uh deep um the people who are on these parliamentary committees probably don’t have as strong
An understanding as they should of what the bank is doing frankly in terms of scrutiny in of day-to-day operations in terms of scrutiny of individual policy decisions it’s public scrutiny more than anything it’s the it’s the stuff we’re talking about is probably the most scrutiny that uh that the governor has I
Guess with the question of accountability here I mean the the Prime Minister appoints the governor does that does that also mean that they could fire one and isn’t that a way maybe to to also hold the bank accountable well I think Pierre POV has suggested that that’s entirely a legitimate way um to
Make the bank accountable in practice it is it has literally never happened it came close in the early 1960s with James K coin um what was that situation well coin and the and the de and Baker government had some fundamental disagreements and in fact coin was was giving public speeches telling the
Government what he believed it should do in terms of fiscal policy the government started leaning back hard against him telling him what to do in terms of monetary policy it kind of came to a head where it was you know either you quit or we fire you coin quit so the
Process now is there’s a there’s something actually built into the bank Canada Act called the government directive so if the bank in Canada Governor is setting monetary policy in a way that the Finance Minister believes is fundamentally flawed the Finance Minister can go to the governor and say
This is what we want you to do it is assumed that if a government took that extreme move the governor would resign it’s assumed that it would create Financial chaos it a loss of confidence in a central bank govern it would gut the value of the Canadian
Dollar overnight it would uh it would gut the value of the Canadian stock market overnight it would be a mess wow okay so even though as you say Pier pev the leader of the conservatives is is talking about it this might not actually if if he were to be in power this might
Not actually be a good move no and I frankly I don’t even know what he would advise the next Governor to do other than what this Governor is already doing his objection is that we got in this problem with inflation in the first place his objection is with what the
Governor didn’t do a year and a half ago not with what the governor is doing now so it would be kind of odd for him to fire a governor and replace him with another Governor executing exactly the same policy interesting okay um okay so Dave we talked about kind of like you
Know few things here and there that the bank has been changing I wonder are there any broad changes that the government could make to to address the concerns that people have around the Bank of Canada well there are um whether the government is prepared to do that
Kind of thing I don’t know in Australia their government and their public were upset enough about the direction of interest rates about the direction of inflation and one of the things they came out with was a notion that instead of having so much power in the hands of
The governor or the governor and a few people who work with the governor they came out with a whole range of of proposals but a key one was to set up a new body of uh a new panel of basically independent experts who would set the policy and have the governor be one
Member of that panel now a similar proposal has recently come up in a uh in a bill that was uh that was tabled in the Senate um Diane belmare is the the senator who tabled it and um and that that is the centerpiece of her proposal
Is to get rid of the governing Council which is effectively a bunch of Bank of Canada employees with as I said one exception now one One external expert and to make it a panel that is majority external experts it’s still not an elected body at least it’s one that is a
Little bit less sort of internal Clubby um might have a a more divver Diversified uh range of opinions and and maybe that would may be a more robust decision-making process interesting so you said this was a bill introduced in the Senate uh what I guess what are the
Chances here then is that happening it’s essentially private members bill but the whole idea is let’s get people talking about this maybe there is a model that makes more sense than the one we’re doing is maybe more publicly responsive maybe inflation as the sole objective is not enough maybe maybe we should be
Looking at another thing that’s one thing that Diane belmar’s Bill does talk about is saying maybe Canada needs a dual mandate lots of other governments do usually it means looking at inflation and maximizing employment at the same time instead of just looking at inflation basically it’s difficult to do
Because it’s those two things aren’t always consistent but a lot of other central banks have done it the the fed and the US has a dual mandate it’s not impossible to try to juggle these two priorities and put them essentially on an equal footing um I should say that
The last uh five-year renewal that the Bank of Canada had in 2021 does in fact talk about maximizing employment but as a secondary goal um it’s all worth talking about just because something is was set in law somewhere and it’s always been done this way doesn’t mean that it
Always should yeah a big question I have here Dave is uh we know we’ve talked a little bit about kind of politicians and they they’re waiting into this now right and this is also why people are hearing opinions about the Bank of Canada how do we keep this discussion from being so
Partisan because I think that’s a big part of what we’re seeing these days in federal politics and this is informing people’s opinion about the Bank of Canada I think as the public as voters we need to be smarter about this stuff we need to understand it better
Ourselves we need to be we need to educate ourselves better on it if we don’t want partisan politics to take over to discussion we have to demand that our elected officials have those discussions on a higher level on a realistic level we need to have our leadership not just upset that the
Plumbing’s not working but actually go to the trouble to understand what the problems are and try to address them with meaningful policy Dave thank you so much for taking the time to walk us through all this today oh it’s my pleasure that’s it for today I’m man ramman welms our producers are meline
White Cheryl southernland and Rachel Levy mlin David Crosby edits the show Adrien Chung is our senior producer and Angela Penza is our executive editor thanks so much for listening and I’ll talk to you tomorrow that
With inflation still stubbornly high, it seems like interest rates could remain elevated for quite some time. And the stress of that has some Canadians wondering who gets to make these big economic decisions.
Report on Business columnist David Parkinson explains the relationship between the Bank of Canada and the federal government, how interest rates are set and what changes might be worth considering when it comes to changing how Canada’s central bank works.
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They need to leave the banks alone