Is Canada’s Monetary Policy Hopelessly Politicized?

You need the nuance. It’s critical. Hold that thought.

The Bank of Canada underwhelmed markets Wednesday with a smaller-than-expected 50bps rate hike, despite no respite on the inflation front. In addition to being the smallest hike in three meetings (figure below), the statement language appeared to skew dovish. At least at the margins.

Although the bank acknowledged the persistence of inflation and domestic conditions conducive to ongoing upward pressure on prices, the statement nevertheless hinted at something akin to patience, which is notable considering it was just three months ago when the BoC delivered a 100bps hike.

“The effects of recent policy rate increases by the Bank are becoming evident in interest-sensitive areas of the economy,” the BoC said, citing the housing market, where builder Mattamy Group this week said orders dropped 66% YoY during its latest quarter.

“Housing activity has retreated sharply, and spending by households and businesses is softening,” the BoC continued, on the way to suggesting that although additional rate hikes will probably be necessary, the size is up for debate. “Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding,” the statement said.

You’d be forgiven for suggesting that policy will be “influenced” by more than just the macro fundamentals and concern for “long and variable lags.” It was just Tuesday when Chrystia Freeland felt compelled to defend Tiff Macklem who, in addition to never-ending, flagrantly duplicitous criticism from Pierre Poilievre, is now under siege from the Canadian left too.

Last week, the charismatic Jagmeet Singh, leader of the New Democratic Party, tacitly (so, not explicitly) suggested Justin Trudeau should intervene in monetary policy on the excuse that the current policy bent is guaranteed to undermine employment. “We fully understand and respect that the Bank of Canada is independent, and we believe it should continued to be [but] we also know that the BoC is following the mandate given by the federal government,” Singh wrote, adding that,

Last fall, your government had the opportunity to revise the BoC’s mandate, but instead of changing the mandate, you kept the traditional narrow focus on inflation targeting with an added consideration for maximum sustainable employment. Since then, we have seen steady, aggressive interest rate hikes — along with the [Fed], the most aggressive among G7 and other major central banks. This one-size-fits all solution to inflation is already laying the groundwork for a recession and making life hard for most people, especially working families and Canadians living on fixed incomes. Does the government believe that the Bank’s recent actions — dramatically increasing interest rates and thus undermining employment — are consistent with the goal of “maximum sustainable employment?”

So, that’s Singh. To reiterate, Macklem is also dogged by the incorrigible Poilievre, who, among other things, has threatened to fire him (Macklem) and accused the bank of functioning as a politicized “ATM” for Trudeau.

On Monday, less than 48 hours before the BoC’s October meeting, Poilievre did precisely what you’d do if you were a right-wing populist in the current environment: He pretended that a developed market central bank can go broke. “The bank of Canada is losing money for the first time ever on rising rates,” he said, on his always lively Twitter feed. “Who could have predicted two years ago that the central bank would today be hemorrhaging billions of dollars and need a bailout from taxpayers?” he wondered, sarcastically. (Poilievre says he predicted it.) He tagged his post with “#JustinFlation,” which isn’t very imaginative as far as populist bombast goes.

Of course, Poilievre is a relentless critic of above-target inflation in Canada. When I described his criticism of Macklem as “duplicitous” (above) I meant that, like any opportunistic politician seeking to capitalize on public disaffection, he wants to have it both ways, which in this case means criticizing the BoC for contributing to inflation and then castigating the bank for the side effects of efforts to control it. On October 4, in a somewhat cartoonish video posted to social media, former leader-turned Poilievre surrogate Andrew Scheer, said the bank “created billions out of thin air, caused inflation and then denied it.”

As Bloomberg noted, documenting the results of a Nanos poll they commissioned, “30% of Canadians rank Poilievre as the leader most trusted to reduce inflation, compared with 22% for Trudeau and 10% for Singh.”

Macklem is thus in a tough spot, something Freeland tried to address Tuesday. “Canada is a country of peace, order and good government,” she insisted, in remarks to reporters. “Institutional stability very much includes the independence of the Bank of Canada. Our government respects [that] independence.”

And yet, just this week, Tyler Meredith, Freeland’s former director of economic strategy, published an Op-Ed in The Globe and Mail arguing that there’s “ample evidence” to support a prospective BoC decision to “slow down” rate hikes.

Fast forward to Wednesday, and that’s precisely what Macklem did — he slowed down rate hikes, and then told reporters that “This tightening phase will draw to a close.” (He also said “We aren’t there yet.”)

So, while it’ll be tempting for single-minded markets to interpret the BoC’s deescalation as another nod in the dovish pivot direction (akin, perhaps, to the RBA’s step down earlier this month), the political atmosphere makes it very difficult to escape the suspicion that monetary policy in Canada is now thoroughly politicized. That’s the bigger story. Or at least the more interesting tale.

Coming full circle: You always need the nuance.