Outgoing Bank of Canada governor Mark Carney’s stick-handling of the 2008 financial crisis was widely viewed as a central-banking success story; it helped him snare his new gig as governor of the Bank of England, starting on July 1. But in many ways, Carney’s replacement, Stephen Poloz, the head of Export Development Canada, has an even more vexing task in front of him. Whereas Carney moved swiftly but predictably to drop benchmark interest rates when faced with the global financial crisis (and, somewhat less predic ably, announced he intended to keep them there for an extended period), Poloz faces several smaller, but no less troublesome threats: an overheated housing market, soaring personal debt, stubborn unemployment and anemic GDP growth. And they come at a time when conventional monetary policy has far less influence, given that money has been so cheap, for so long.
In Europe, the markets barely reacted to the European Central Bank’s recent move to cut rates by 25 basis points, while the U.S. Federal Reserve’s latest efforts at quantitative easing, or “printing money” by buying assets from banks, had less impact than they did just a few years ago. “We have a generation of investors who have not experienced high, or even materially rising, rates,” Benjamin Tal, the deputy chief economist at the Canadian Imperial Bank of Commerce, wrote in a recent report. The result, he says, is household credit rising at a rate usually seen during recessions, and companies borrowing mainly to buy back stock or build cash positions, which doesn’t help the economy. The upside, Tal says, is that if strong economic growth does return, “the surprise will be how little an increase in rates it will take to achieve any desirable slowing in activity.”
In the meantime, many expect Poloz will follow in Carney’s footsteps by finding creative ways to stimulate the economy—perhaps by drawing on his EDC background to help exporters flourish amid a high Canadian dollar. But the truth is that he has little choice. Thanks to Carney’s easy money, Poloz’s chief recession-fighting weapon—the power to lower interest rates—is now a gun with no bullets.