Listening to the recent debate about whether the Bank of Canada should or would cut its lending rate, it seemed to me that the only argument in favor of cutting was that the economy was slowing and needed immediate stimulus. The arguments against cutting struck me as much stronger: concern about inflating the housing bubble; concern about pushing the currency even lower when it is already in near-freefall; concern that an interest rate cut wouldn’t have much impact on the overall economy; and the belief that the bank should save some monetary policy ammunition for the future.
Finally, the argument was made that, rather than continuing to rely solely on monetary policy, the government should turn to fiscal policy. This argument is consistent with the Trudeau Government’s commitment to stimulus by means of a major infrastructure program, and indeed strengthens the justification for such a program.
One thing that the discussion, driven mainly by economists, overlooked was the question of political optics. It so happened that Bank of Canada Governor Poloz would be announcing the Bank’s monetary policy decision at almost the same time Prime Minister Trudeau would be speaking to the World Economic Forum at Davos. One didn’t need an advanced degree in political forecasting to be certain that the Prime Minister would be talking up Canada, emphasizing the strengths of the Canadian economy, and arguing that Canada is a great place to invest.
For the Governor of the Bank of Canada to be announcing an interest rate cut at precisely that moment would undercut (no pun intended) the Prime Minister’s message. The Bank would be saying that the vaunted Canadian economy is actually in recession. In preparing for my public management class next week, I went so far as to imagine what the front page of The Globe and Mail would look like if that happened. There would be juxtaposed pictures of Trudeau and Poloz and I came up with the following banner headline: Trudeau Talks Up Canada: Poloz Cites Weaker Economy. I prepared that as a slide yesterday.
It turned out that The Globe did something very similar today, which I’ve reproduced. It juxtaposed pictures of Trudeau and Poloz, looking in different directions. The banner headline was “Next Move Belongs to Ottawa as Poloz Holds Line on Rates.” The front page also contained dueling quotes, Trudeau saying “The low oil prices are a challenge, but the Canadian economy is a lot more than just natural resources,” and Poloz saying, “We need to be patient … [the fall in the price of oil and the exchange rate are] disrupting the lives of many Canadians, whether through job losses or through higher prices for imported goods.”
Our newspaper of record was clearly looking for political daylight, or at least a difference in perspective, between the Governor and the Prime Minister. What they communicated, however, is a sense that the Government and the Bank are on the same page and are working together. The Globe’s article also quoted Mr. Poloz saying that “he and his advisers were leaning toward an interest-rate cut, but decided to wait for the budget” and that “the likelihood of new fiscal stimulus was an important consideration [in the decision not to cut].”
Had the Bank of Canada cut the interest rate, the front page of The Globe, and other papers, would have looked much worse for the government, emphasizing the urgency of the Bank’s decision and the contrast between its urgency and the Government’s unwarranted optimism. My conclusion is that nominally independent governors of central banks must work closely with their governments, and part of working closely entails an awareness of political messaging and the need to coordinate the Bank’s message with the Government’s. Trudeau’s mandate has started with Poloz on the same page.