We’ve understood for a long time in Canada that interest rates are best set at some distance from politicians. Since 1991, when Bank of Canada Governor John Crow and Finance Minister Michael Wilson announced that inflation would guide monetary policy, the government and the central bank have worked out a mutually agreeable arrangement. With one exception, these marching orders have come at five-year intervals. It’s understood that during the intervening years, the Bank of Canada will be left alone to achieve the inflation goal however it sees fit.
This measure of independence was necessary because achieving the new inflation mandate would require winning the public’s trust. A central bank always can slow inflation by strangling economic growth with higher interest rates. But to achieve a certain rate of inflation over time, economic actors must buy in. Competence assuages doubts. So does the understanding that policy will be shielded from the whims of ideological or vote-chasing politicians. The third element is transparency: the Bank of Canada pulled back the curtain on its decision-making process, scheduling eight policy announcements a year and describing each decision in a press release. Canada’s Consumer Price Index has averaged annual increases remarkably close to the central bank’s target of 2%, a testament to sound economic policy and dedicated implementation.
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