The Bank of Canada made two significant headlines with its latest interest-rate decision. Neither was directly related to the decision itself. 

The Governing Council, led by governor Tiff Macklem, left the benchmark interest rate unchanged at five per cent on Wednesday, as most Bay Street forecasters predicted it would. 

Instead, the news was in the thinking that went into the central bank’s decision to do nothing. 

First, Macklem turned the tables on all the politicians who have been haranguing him to stop raising borrowing costs. 

And second, the central bank set out a scenario that would see interest rates and inflation stay relatively high for at least two years, and possibly much longer. “Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed,” the Bank of Canada said in a statement. 

Let’s start with the first headline, since the increasingly tense relationship between the Bank of Canada and legislators could influence the second. 

Central banks were revered as heroes after the Great Recession. They did extraordinary things to prevent a deep depression in 2008 and 2009, such as dropping interest rates to effectively zero and leaving them there for an unusually long period of time. Equity markets recovered and then soared to record levels. So did house prices, making households feel richer, which helped restore consumer confidence and demand. 

The central banks did it again in 2020, reversing the epic economic collapse that was triggered by the COVID-19 pandemic by helping stoke an equally epic recovery. But Macklem and many of his peers failed to anticipate the burst of inflation that came with the recovery from the COVID recession. That’s been painful for a lot of households and businesses, as have been the rapid interest rate increases that central banks have implemented while scrambling to catch up. 

So, no more laurels. Pierre Poilievre said early in his ultimately successful campaign to lead the Conservative Party that one of the first things he’d do as prime minister would be to fire Macklem. More recently, several premiers have published open letters to the central-bank governor, calling on him to stop raising interest rates.

“Millions of Canadians, including here in Ontario, are already struggling to make ends meet,” Ontario Premier Doug Ford wrote in an open letter to Macklem dated Oct. 22. “There is simply no excuse for increasing the already crushing pressure previous interest-rate hikes have placed on so many families and businesses.” 

The Bank of Canada isn’t used to this kind of attention. There’s a longstanding convention that central bankers should be left alone to do their jobs. The thinking is the public will have greater confidence in the central bank’s policies if it believes those policies are based on neutral analysis of economic conditions, not pressure from vote-seeking legislators. 

So, was Macklem cowed by Ford? Probably not, but the central bank is concerned that people will start to wonder who is making the decisions about interest rates. That might explain why, at the press conference that followed Wednesday’s rate announcement, Macklem was ready with an answer on whether fiscal policy—the taxing and spending decisions made by governments—is helping or hurting the fight against inflation. 

“Fiscal policy is appropriately the decision of elected officials and ultimately parliaments,” said Macklem, adding that governing is a “difficult job.” Then he said this: “It is appropriate, though, for us to comment on how fiscal policy is impacting inflation.” 

The Bank of Canada reckons the economy can grow at an annual rate of about two per cent without affecting inflation. At that pace of growth, providers of goods and services have enough capacity to keep up with demand. When growth is faster than that, companies struggle to keep up, and respond by raising prices. 

Over the past year, spending by the federal government, its provincial counterparts and municipalities increased less than two per cent, suggesting fiscal policy has had little impact on inflation, Macklem said.

However, while preparing its new quarterly economic outlook, the central bank determined that “spending by government contributes materially to growth, averaging 2.5 per cent through 2024, somewhat above potential output growth.” In other words, if Ford, British Columbia Premier David Eby, Newfoundland and Labrador Premier Andrew Furey and other legislators want the Bank of Canada to stop raising interest rates, they could help by cancelling or postponing some spending plans. 

“If all those spending plans are realized, government spending will be adding to demand more than supply is growing,” Macklem said. “In an environment where we’re trying to moderate spending and get inflation down, that’s not helpful.”

Macklem added, “It would be helpful if governments considered the inflationary impact of their spending decisions when they’re making their spending plans. It’s going to be easier to get inflation down if monetary and fiscal policy are rowing in the same direction.” 

The Bank of Canada has mostly taken the punches thrown at it over the past couple of years. The choice Macklem made to counter with his comments Wednesday suggests policymakers have become sensitive about what all these blows could be doing to its credibility. 

Its only job is to keep inflation growing at an annual rate of about two per cent. Its new forecast has inflation at 3.3 per cent at the end of this year, 2.5 per cent at the end of 2024 and 2.1 per cent at the end of 2025. That’s why Macklem has left the door open to more interest-rate increases: the job isn’t done. 

There are other ways to cool inflation than raising interest rates. But until governments join the fight, the Bank of Canada will continue using the only tool at its disposal. 

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.