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The Bank of Canada’s interest-rate surprise potentially opens up Governor Tiff Macklem to the accusation that he and his governing council are reacting to political sniping against them, economists said.
The central bank raised its overnight rate by 50 basis points on Wednesday to 3.75 per cent. Traders and a majority of economists polled by Bloomberg were anticipating a larger increase of 75 basis points.
Those expectations were based, in part, on Macklem’s Oct. 14 remarks that the bigger policy risk was under-tightening. Five days later, Statistics Canada reported headline inflation of 6.9 per cent for September, which appeared to the seal the case for a larger hike.
But monetary policy has become a target for some on the political left.
Last weekend, Jagmeet Singh, the leader of the New Democratic Party, said there is “no merit” to the Bank of Canada’s approach to steep rate hikes and argued it unfairly punishes lower-income Canadians. He released a letter addressed to Prime Minister Justin Trudeau that said the central bank was “already laying the groundwork for a recession.” Singh’s party has an alliance with Trudeau’s Liberal government to ensure it can pass key legislation.
“This was a masterclass in how not to communicate,” Andrew Kelvin, chief Canada strategist at Toronto-Dominion Bank, told Bloomberg of the Bank of Canada’s approach. “Surprising dovishly after political figures started suggesting the bank slow the pace of rate hikes will raise questions about commitment and credibility.”
Benjamin Reitzes, an economist at Bank of Montreal, agreed. “One potentially prickly point for policymakers is that a number of politicians have been weighing in on the policy decision in recent weeks, stating that large rate hikes aren’t appropriate anymore,” Reitzes said in report to investors. “Expect plenty of chatter about potential political influence, whether real or perceived.”
Singh praised the central bank’s decision to go with a smaller hike on Wednesday. “It’s a good sign that they’re not moving as aggressively,” he told reporters outside the legislature. “We’ve also heard from other economists saying that we should just pause, that the increased interest rates now will take some time to actually have an impact.”
A former top Liberal aide weighed in this week as well.
Tyler Meredith, who was one of Trudeau’s longest-serving economic advisers until last month, publicly urged Macklem to show “flexibility” and consider easing up. “There is ample evidence for the Bank of Canada to begin to slow down and potentially pause. They should heed it,” Meredith wrote Tuesday in The Globe and Mail newspaper.
Macklem has also come under criticism from the other side of the political spectrum. Conservative Party Leader Pierre Poilievre has targeted Macklem since the early days of the pandemic for allegedly enabling Trudeau’s deficits through purchases of government bonds. Poilievre even promised to fire Macklem, though he has avoided repeating that pledge since his election as leader in September.
All of this led Finance Minister Chrystia Freeland to defend the central bank, telling reporters Tuesday that “institutional stability very much includes the independence of the Bank of Canada.”
Asked Wednesday whether his credibility had been damaged, Macklem deflected the question.
“Look, these are difficult decisions,” he said. “I will say that the independence of the central bank becomes more important when the decisions are difficult.”
To some economists, the bank’s decision is all about the evidence of a slowing economy, not politics. The central bank cut its growth projection for 2023 in half, to just 0.9 per cent.
“I think the economic forecast justifies what they did,” said Dominique Lapointe, director of macro strategy at Manulife Investment Management.