Like other central banks around the world, the Bank of Canada raised interest rates at a dramatic pace in 2022 in an effort to reduce high and persistent inflation. Much of this inflation was the result of higher global prices for energy, food and other goods caused by pervasive supply disruptions (linked to the pandemic and Russia’s invasion of Ukraine). The rest is the legacy of overly stimulative fiscal and monetary policies enacted in Canada and elsewhere early in the pandemic to reduce the risk of economic depression.

The increase in inflation over the past two years has been stunning. In the three decades preceding the pandemic, the average annual inflation rate was roughly at the Bank of Canada’s two per cent target. The surge in global inflation has damaged the credibility of central banks and sparked calls for policy reviews and governance reforms.

Next month, the Bank of Canada will take two distinct steps to strengthen its governance and enhance the transparency of its policies. While not directly tied to Canada’s recent inflation experience, the timing of these reforms is opportune and their implementation should strengthen the effectiveness of monetary policy in what may be a highly volatile period for the Canadian economy.

Firstly, a non-executive deputy governor will join the Bank’s governing council, the body primarily responsible for monetary policy. In the past, the council has had only internal members who have day-to-day responsibility for various Bank functions and the overall strategic direction of the Bank. The inclusion of a new external member, who would likely have a different background and professional experience, should inject a more detached and diverse perspective into policy deliberations, help prevent group think, and help the Bank better communicate policy to a wider audience.

Secondly, for the first time the Bank will publish a summary of the governing council’s deliberations two weeks after the Bank’s January rate decision. Such a summary, recommended by the International Monetary Fund in its 2022 review of the Bank’s communications, will provide Canadians with insight into deliberations behind the Bank’s decision (although the Bank will not release any formal minutes or transcript of discussions). And since the governing council’s monetary policy decisions are normally made by consensus, individual member opinions will remain confidential.

The summary will highlight critical aspects of the council’s economic outlook, key risks surrounding the outlook, and possibly some differences in views among council members about these considerations and the implications for monetary policy. Again, the summary will hopefully advance public understanding of the rationale for the Bank’s interest rate decisions and uncertainty about the economic outlook. In turn, this increased transparency should make monetary policy more effective by enhancing the public’s interpretation of the Bank’s likely path for its policy rate.

However, while these reforms are useful incremental steps, they still leave the Bank of Canada behind other comparable central banks in terms of governance and transparency. For example, the Bank’s governor remains solely responsible for the conduct of monetary policy under the Bank of Canada Act. In all other major jurisdictions including the United States, that responsibility is shared across members of the monetary policy committee. Several other major central banks also publish a projected interest rate path consistent with their economic outlook and therefore must explain changes to this path as their economic outlook evolves. This is currently not the case in Canada.

During his recent House Finance Committee meeting, Tiff Macklem, governor of the Bank of Canada, proposed a post-mortem review of monetary policy during the pandemic. Any such review should seek to build on these two reforms.