Conservative Leadership Contender Blasts Bank of Canada Chief

(Bloomberg) -- Conservative Party leadership hopeful Maxime Bernier criticized Bank of Canada Governor Stephen Poloz for his praise of the Liberal government’s expansionary fiscal policies, while saying he would order the central bank to revisit the merits of a zero inflation target if elected prime minister.

Poloz “has spent the past year using every occasion to champion the Liberal government’s misguided plan to go into deficit and spend more of the taxpayers’ money,” the Quebec lawmaker said during a speech Tuesday in Ottawa.

In keeping rates unchanged in April, the central banker said the measures introduced in Prime Minister Justin Trudeau’s first budget gave the nation “a better mix of policies today than we would have without that fiscal change.”

Bernier observed that one year earlier, when Stephen Harper was prime minister, Poloz had declined to comment when asked by a Conservative member of the finance committee to explain the benefits of a balanced budget for the Canadian economy.

Poloz was wrong both in what he said and to opine on fiscal policy at all, Bernier added. The Bank of Canada declined to comment on his remarks Tuesday.

Debt Build-Up

During his speech, the 53-year-old said low interest rates hadn’t helped stimulate economic activity in Canada (or Japan and Europe, for that matter) but only served to encourage household indebtedness. He is one of more than a dozen contenders vying to lead the Conservative Party.

Poloz has explained -- most recently here -- that low interest rates are working. Debt build-up, to a certain extent, represents economic activity that has been pulled forward in an attempt to smooth the business cycle. Another key part of this transmission mechanism includes the currency weakness associated with interest rate cuts, which make a nation’s exports more attractive to foreigners and also encourages domestic production.

Bernier also said that in the event he is elected prime minister, he will call upon the Bank of Canada to examine the possibility of targeting zero inflation, citing the corrosive effect that inflation has on consumer purchasing power. The central bank has had a mandate to target an annual rate of inflation of 2 percent, as defined by the consumer price index, for over two decades -- the longest in the Group of Seven.

Inflation Debate

In the wake of the financial crisis, most debate around changing inflation targets discussed whether or not it would be appropriate to raise, rather than lower, them. A higher inflation target, if achieved, gives a central bank the ability to reduce real policy rates (the overnight rate minus inflation) to much lower levels when a downturn strikes, thereby enhancing its ability to stimulate economic activity without resorting to unconventional measures like large-scale asset purchases. The Bank of Canada currently believes it is able to cut rates to negative 0.5 percent without undermining the stability of the financial system.

The 2 percent target is “low enough so that it doesn’t really distort much in the economy, but it’s high enough so that when you’re in a state of normalcy, you have 2 percent inflation, and you have interest rates that are above this,” Poloz said in January 2014. “If the rate of inflation were, say, zero, just to have a thought experiment, obviously there would be a lot less room to maneuver because interest rates would start at a much lower place when the bad news came.”

In 2011, the Bank of Canada examined the potential benefits of lowering its inflation target but opted to stand pat. Its mandate to target an annual inflation rate of 2 percent was renewed this fall for a five-year period ending on Dec. 31, 2021.