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Prime Minister Stephen Harper’s recent admission, on August 24, of having had a telephone conversation with Bank of Canada’s Stephen Poloz, in the middle of a federal election campaign, raises important questions regarding the independence of Canada’s central bank and jeopardizes Mr. Poloz’s conduct of monetary policy.
Let’s be clear. The call itself is certainly not all that bizarre. After all, Mr. Poloz and Mr. Oliver, our finance minister, talk on a regular basis. Although conversations between Mr. Poloz and Mr. Harper are less frequent, they are not unusual. But having been made during an election, and then on top of that, formally announced (which is something that is never done) is both bizarre and potentially worrisome. In fact, it casts doubt on the relationship between the government and the Bank of Canada, which is supposed to operate at arm’s length of the government and is independent from any political influence. While not a huge believer in the notion of central bank independence per se (there is no credible empirical support that independent central banks are more successful), Harper and his conservative ilk believe in it and consider it sacrosaint.
So why would Mr. Harper betray one of his and his supporters’ most cherished economic principles?
It is alleged that Mr. Harper and Mr. Poloz discussed the recent turmoil in both China and financial markets. But how can we be certain they did not discuss other issues? For instance, did Mr. Harper pressure Mr. Poloz to lower interest rates in September to give Mr. Harper an advantage in these elections? After having tried to influence and control the Supreme Court of Canada, is Mr. Harper trying to extend his tentacles to the Bank of Canada? Is Mr. Harper trying to take control of and influence monetary policy?
The call was even more bizarre since neither Mr. Harper not Mr. Poloz have any control over the events in China or indeed those on financial markets, which are the domain of speculators. Nothing in that conversation would have made a difference. So again, this begs the question: Why the call?
But it gets more problematic. This much-publicized call has now placed Mr. Poloz in quite the conundrum. If he lowers rates in September, as some observers seem to suggest, he will surely be accused of pandering to the Conservatives. On the face of that argument alone, my guess is that any rate cut will now wait until after October 19.
But what if something happens before then that requires Mr. Poloz to act decisively and to lower rates in September? After all, we have seen the extreme volatility of financial markets, which could get worse. China’s growth has slowed dramatically and that will no doubt impact our economy. So in these chaotic and volatile times, the uncertainty that something may happen is high. And if it does, will Mr. Poloz lower rates and risk being accused on being Mr. Harper’s puppet? Or will he choose to postpone a rate cut and in the process risk further harm to the Canadian economy?
None of this of course can happen, but it could. And the infamous phone call casts doubt on the conduct of monetary policy. Did they or did they not talk about this? Who knows. Bottom line, Mr. Harper has now cast doubt on the legitimacy of monetary policy and Mr. Poloz’s office.
In the end, we are left with only one conclusion: The call between Harper and Poloz was political, and was aimed perhaps at making Mr. Harper look like he is on top of things, especially the economy. But surely this is the epitome of irony. After all, we are in a recession (the only G7 country to be in recession, I may add), largely the result of Mr. Harper’s doing — his economic policies contributed to what can only be called, the “Harper recession.”
Canada’s growth has been at best mediocre for the past few years, and Mr. Harper has refused to use fiscal policy to stimulate the economy, preferring to keep to his mantra of balancing the budget. So why has Mr. Harper chosen to interfere in the conduct of monetary policy now, during an election campaign? Mr. Harper does not seem to realize the potential damage he has done. His desire to control (or at least appear to be in control) of the economy is boneheaded at best, dangerous at worse. And with no fiscal policy to speak of, monetary policy is the only thing we have. And now it lies in doubt.
And what about Mr. Poloz’s future. What if Mr. Mulcair (more likely) or Mr. Trudeau (less likely) forms the next government? Will Mr. Poloz enjoy their full and unequivocal support? Or will Mulcair and Trudeau lose confidence in Mr. Poloz and seek a replacement? At a time when the economy is fragile, this could potentially create more fragility and further harm the economy. So chances are, Mr. Poloz will stay put. But for how long? And what kind of relationship will he have with the new Prime Minister? Surely, such uncertainty cannot be good for our economy.
All this started with a phone call that never should have taken place.
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