The Important Monetary Policy Considerations for a Seceding Alberta

From: Charles St-Arnaud

To: Alberta referendum voters

Date: September 21, 2026

Re: The Important Monetary Policy Considerations for a Seceding Alberta

This Memo is part of a series the C.D. Howe Institute is presenting to better inform the public about the policy issues and complexities of the potential separation of Alberta, and its consequences on Albertans, businesses, and the rest of Canada. Today: Many money decisions, which builds on a Memo last week by former Bank of Canada Deputy Governors Rhys Mendes and John Murray.

Alberta’s referendum result is uncertain. Which means it is important to understand the complexities involved in the independence process.

Among the most crucial decisions a new country must make on Day 1 (or earlier, if possible) is choosing its currency. This decision has major implications for the rest of the financial system, as it will shape monetary policy and the structure of the financial and banking systems.

Choosing a new currency regime

When choosing a currency, Alberta has three options: 1) continue using the Canadian dollar; 2) create its own currency and let it float; or 3) create its own currency and adopt a peg or a currency board fixing its value to the value of the Canadian dollar or other currencies like the US dollar. Each has its advantages and disadvantages.

Keeping the Canadian dollar, at least in the interim, is the most logical choice for Albertans on Day 1, as it eliminates exchange-rate risk. Nevertheless, Canada would have a big say in it, as the use of another country’s currency is ultimately decided by the issuing country. Access to Canada’s financial and banking infrastructure will need to be negotiated, meaning Canada can impose restrictions, including on the use of Canadian financial rails.

Moreover, because the major Canadian banks are federally regulated institutions, an interim agreement will be required to ensure they can continue operating in Alberta. This will need to cover aspects such as banking licences, deposit insurance, payment systems, lender-of-last-resort facilities, and prudential regulation.

The main disadvantage here is the lack of independence in both monetary policy and financial regulation. This is why it is likely to be a temporary arrangement in place until the new institutions and financial infrastructure are established.

The next two options involve the creation of a new currency, with the follow-up question being whether to make it free floating or fixed to the exchange rate of another currency. Whether to choose a fixed or floating regime also needs to be balanced against the desire for institutional independence and the free flow of capital.

Only a free float allows full independence of monetary policy. However, this independence comes at the cost of higher risks, including potential exchange rate volatility, capital flight, and the need to establish credibility.

A peg or currency board provides choice only in the sense of making some initial choices about the exchange rate regime and target. However, the central bank has limited flexibility thereafter, as it must use its tools to ensure the exchange rate remains aligned with its target. As a result, interest rates could no longer be used to stimulate the economy. Moreover, to ensure credibility, it would require sizeable foreign exchange reserves and potentially significantly higher interest rates (at least early on) to support the currency peg. Indeed, higher interest rates are likely in both fixed and floating exchange rate regimes as foreign investors will demand compensation for the increased risk due to untested credibility. However, a fixed exchange rate offers lower inflation risk because the regime imposes policy discipline and anchors expectations, if seen as credible.

Creating a central bank and foreign exchange reserves

Creating a central bank involves important considerations. While its structure, independence, choice of framework, and monetary decision-making processes will all matter in providing confidence in the institution, central bank credibility is extremely hard to build and requires consistency over a long period.

In all cases, the central bank will require a fair amount of currency reserves to support the value of currency and facilitate international transactions. Upon separation, Alberta will have none, and its entitlement to its share of Canada’s foreign exchange reserves – currently about $126 billion – would need to be negotiated; in the same way as its share of the Canada Pension Plan, Government of Canada debt, and other federal assets to which Alberta could have a claim, will need to be determined.

Alberta is in a unique position, having a sizeable trade surplus, which could help in acquiring foreign currency by using royalty revenues from oil and gas extraction. However, converting these revenues into reserves could impose a fiscal cost when Alberta would already be facing large transition costs. Moreover, potential capital flight from Alberta could quickly overwhelm its capacity to intervene, as it will likely take years to accumulate a credible amount of foreign reserve, especially if Alberta opts for a fixed exchange rate regime

One suggestion is for Alberta to hold foreign exchange reserves in kind, or in the form of physical oil. While the idea is interesting, it is also somewhat impractical. It would require Alberta to sell the physical oil before it could use the proceeds to intervene in financial markets, adding transaction costs and potential execution delays due to accessibility and convertibility. Moreover, it would require the construction of massive infrastructure to hold these oil reserves, adding costs.

Legal considerations of currency redenomination: Lex Monetae

The experience of the risk of a member country leaving the Euro area during the European sovereign debt crisis in the early 2010s has shown that legal considerations could complicate any redenomination following independence.

As such, the legal principle of lex monetae, which vests a sovereign state issuing a currency with control over its value, would dictate what would remain in Canadian dollars and what could be redenominated by an independent Alberta.

Without being a legal expert, it generally means that only contracts governed by Alberta law, those with significant ties to Alberta, or those in which payments are made in Alberta can be redenominated into a new currency. This generally means that bonds issued by the Government of Alberta and municipalities, bank accounts, mortgages and direct lending to Albertans should be easily redenominated. However, corporate debt issued under non-Alberta laws could be more difficult to redenominate. The same is likely true for service contracts with out-of-province providers. This could lead to significant balance sheet mismatches for some businesses.

Moreover, redenomination risk could lead to higher borrowing costs due to uncertainty about independence, as the experience of Italy, Spain, Portugal, and Greece in the 2010s has shown, affecting not just bonds but also lending to Alberta residents. So far, there is no evidence that it is the case.

As Albertans contemplate their role in the Canadian federation, difficult choices must be made on the critical issues of currency, monetary policy more broadly, and financial regulation.

Charles St-Arnaud is Chief Economist at Servus Credit Union.

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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.