Central Bank Independence: What Can a Minister Say about Quantitative Easing?

I think it is safe to say that today’s conventional wisdom is that central bank independence from politics should be sacrosanct. Canada’s Finance Minister, Joe Oliver, is in lukewarm water after saying publicly last week: “Quantitative easing is not on the table”. Critics suggest that this represents an inappropriate interference with the independence of the Bank of Canada, which has responsibility for the country’s monetary policy:

“I thought that Minister Oliver overstepped when ruling out (quantitative easing) because it’s not his decision,” said Ian Lee, an economics professor at Carleton University’s Sprott School of Business. “You may think that, you may privately say that, but that’s not the sort of thing I think the minister of finance should be saying. You know, just respect the sensibilities of the two positions.”

Lee, however, noted that while the Bank of Canada is supposed to be free to make its own decisions without the government’s input, the governor likely feels pressure to follow the finance minister’s lead.

The finance minister, after all, is the governor’s boss, he noted.

A clash of opinions that leads the finance minister to overrule the central bank governor can have big consequences.

“The governor of the Bank of Canada has two choices: either he resigns or he bows down to the government because they are elected and they have the electoral legitimacy which of course an appointee does not have,” Lee said.

“But generally the monetary side tries to keep its distance from the finance side and vice versa just because it can really roil markets and roil your currency markets.”

But even a quick glance at the Bank of Canada Act reveals a more complex picture. Section 14(1) is very interesting: “The Minister and the Governor shall consult regularly on monetary policy and on its relation to general economic policy”. Mr. Oliver’s comment suddenly seems rather anodyne, a statement of the obvious. We would need to know much more to say that the Finance Minister spoke out of turn; indeed, it is equally plausible to suggest that his comment was made with the explicit or implicit approval of the Governor following one of their regular consultations.

Section 14(2) is also of interest:

If, notwithstanding the consultations provided for in subsection (1), there should emerge a difference of opinion between the Minister and the Bank concerning the monetary policy to be followed, the Minister may, after consultation with the Governor and with the approval of the Governor in Council, give to the Governor a written directive concerning monetary policy, in specific terms and applicable for a specified period, and the Bank shall comply with that directive.

It turns out that the Minister actually does have the ultimate authority to take decisions about monetary policy. So much for the conventional wisdom!

Now, the formal law may be limited in practice by political norms, such that even if the Finance Minister can lawfully give a binding directive to the Governor, it would be inappropriate for him to do so. It might also be suggested that where a formal method of direction exists, no other method can lawfully be used (a question the Supreme Court of Canada will take up soon). But Mr. Oliver was not purporting to give a specific direction, he made a statement of fact about the Bank of Canada’s current policy. It is hard to say that he did anything wrong, especially once the provisions of the Bank of Canada Act are taken into account.


This content has been updated on July 27, 2015 at 08:03.