Final answer:
The dilution of the Bank of Canada's powers might endanger its independence and compromise the crucial objective of maintaining price stability. Autonomous monetary policy setting is essential in preventing inflation and stabilizing the economy, which is why central bank independence is paramount.
Step-by-step explanation:
If the Bank of Canada's powers were to be diluted, this could come at the expense of a loss in its independence and the goal of maintaining price stability could be put in jeopardy. An independent central bank can define monetary policies without government influence, which is essential for maintaining an exchange rate regime and monetary policies aligned with economic goals rather than electoral politics.
The independence of a central bank allows it to take a nonpartisan look at economic situations and act swiftly in response to financial stress. For example, the ability of a central bank to manage monetary policy can affect interest rates and, consequently, exchange rates, making its independence crucial for the economy's stability. The literature suggests that greater central bank independence is typically associated with lower inflation and no adverse effects on other economic performance indicators, such as real GDP growth or unemployment.
Lack of independence could lead to democratically controlled monetary policy that may become overly expansionary, resulting in higher inflation. Therefore, it underscores the importance of preserving the central bank's autonomy to avoid economic pitfalls such as those witnessed during the 2008-2009 Great Recession.