There’s a French expression: Manquer une occasion de se taire. It means “To miss an opportunity to stay silent,” and it comes to mind every time I read reports in which Finance Minister Jim Flaherty opines on the conduct of monetary policy. Even if his comments were well-informed—which they’re not—he shouldn’t be speaking publicly about his views on how monetary policy should be conducted.
Here is how Canadian monetary policy has functioned over the past two decades:
- The Minister of Finance provides a mandate to the Bank of Canada.
- The Bank of Canada uses whatever instruments it sees fit to carry out it mandate.
This setup has worked well. The mandate is the mechanism for keeping the Bank accountable to its political masters, while the day-to-day management of monetary policy is conducted at arm’s-length from the political sphere. The Bank does not have complete discretion, though: in the case of a serious disagreement, the Minister of Finance can overrule the Bank. (The Governor would then be expected to resign.)
Much of the effectiveness of Canadian monetary policy depends on the Bank of Canada’s credibility: managing expectations for the future is at least as important as setting short-term interest rates. It’s hard to imagine a better way to erode a Governor’s credibility than for a Minister of Finance to develop the habit of second-guessing the Bank of Canada in public.
Jim Flaherty’s comments a couple of months ago on Quantitative Easing (QE) were a good example of What A Finance Minister Should Not Say In Public:
As you know, we in Canada have not been fans of quantitative easing unlike the United States and elsewhere.
In point of fact, QE is a tool that the Bank of Canada views as a legitimate instrument of monetary policy if the need should arise. So far, the Bank hasn’t thought it necessary to implement QE, but what if circumstances change? How would markets react to a Canadian QE exercise with those sorts of comments on the part of the Minister of Finance on the record? Especially when those comments are so ill-conceived?
More recently, we have this:
“I think the pressure [to increase interest rates] will be there, because the Fed in the U.S. should stop printing money, and taper off as they say,” Mr. Flaherty, referring to the dialling back of U.S. bond-buying, told CTV in an interview aired Sunday. “The OECD and the IMF have both said to Canada we ought to let our interest rates go up a bit. So there’ll be some pressure there for that to happen.”
This raises many questions, such as “Is Jim Flaherty mentioning these views because he too agrees that interest rates should go up?”, “Is this some sort of veiled rebuke of the Bank’s current policy stance?” and “Why is he even talking about this in public?”
Mr. Flaherty stopped short, however, of saying what he thinks Mr. Poloz should do, with the minister’s spokeswoman saying Sunday that’s the “domain of the Bank of Canada.”
Phew! While that clarification is welcome, the minister’s spokeswoman isn’t the one who has the authority to demand the resignation of the Governor of the Bank of Canada.
Jim Flaherty will have many opportunities to stay silent about monetary policy in the future. He should take advantage of them.