Love him or hate him, John Crow is one of the most innovative and influential central bankers in Canadian history. So when the former head of the Bank of Canada says the central bank has plenty of mandate on its plate as it is without ordering up a whole new menu of regulatory challenges, we ought to sit up and listen.
That's just what Mr. Crow did Thursday, in a paper he penned for the economic policy think tank C.D. Howe Institute. Mr. Crow argued, essentially, that the Bank of Canada has more than enough responsibility with overseeing the country's all-important monetary policy, and should resist the temptation to take a lead role in regulating and supervising the financial system against the kinds of risks that can trigger financial crises such as the one the world suffered in 2008-09.
He should know. It was under Mr. Crow's watch (1987-1994) that the Bank of Canada's role took on the form with which we are now very familiar and, indeed, comfortable. Where once the central bank vacillated somewhat incoherently in several discordant policy directions – intervening in the currency markets, fine-tuning money supply – Mr. Crow championed narrowing the bank's policy framework to a single guiding principle: Low and stable inflation. He instituted the first inflation targets for Bank of Canada rate policy in 1991; in 1995, shortly after Mr. Crow's departure, the bank officially adopted its now-famous consumer price inflation target band of 1 to 3 per cent.
"Through a record of consistent achievement over many years, the bank has established a remarkable general understanding and acceptance of its monetary policy framework – one centred on sustained low, and therefore stable, inflation as a national financial anchor," Mr. Crow noted in his report.
And that was a remarkable achievement indeed, if you consider the dreadful state of inflation and rate policy in the two decades that preceded the establishment of the inflation anchor. The central bank's laser focus on inflation provided a rock-solid backdrop to one of the most successful economic eras in Canada's history. In the process, the Bank of Canada's credibility soared – giving its words and actions greater sway in the financial community than, arguably, ever before.
Yes, there's a temptation to leverage that credibility into new areas of financial oversight, where other agencies have been perceived as weak and the government may be seen as too easily swayed by politics. But why mess with a good thing?
"There is no particular virtue in adding to the bank's responsibilities further, and quite distinct, policies that will stretch that credibility when appropriate alternatives are available," Mr. Crow wrote.
He's right. The Bank of Canada has been successful in its role over the past two decades precisely because its role has been kept narrow, clear and laser-focused. While we want the central bank to have input into the appropriate establishment of new and necessary regulatory frameworks, and to co-ordinate with other institutions to ensure the smooth functioning of the country's finances, let's not distract it from its crucial monetary priorities – much less confuse, in the eyes of both the bank and the public, what its central priorities are.