Poloz vs. Carney

Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Tiff Macklem had another of their regular chats with lawmakers on the Standing Committee on Finance Hill today. Here are four takeaways from the hearing:

Poloz won’t tell you whether he is more dovish than Carney. The BoC has dropped any reference to Canada’s key interest rate eventually rising. The vague promise that such a thing would happen at some point had been a staple of Carney’s regime. Raising interest rates generally slows economic activity and lifts the value of a country’s currencies compared to foreign currencies, while lowering them does the opposite. Even talking — or suddenly not talking anymore — about hiking rates has an impact, as businesses and families adjust their behavior based on expectations that rates will, or will not, rise. Liberal Scott Brison (Kings-Hants, N.S.) therefore wanted to know whether deliberately dropping any mention of borrowing costs going up in the future meant that the new governor had “set monetary policy on a path that could permit the weakening of the Canadian dollar.” The governor respectfully noted that the reason for dropping any mention of a future rate hike was that inflation has long been running under the BoC target of two per cent. “In that context,” the governor added, the Canadian dollars has depreciated recently, but only a little. Make of that what you wish, but as you weigh Poloz’s reputed “dovishness” compared to Carney, keep in mind that it is the new governor who has explicitly acknowledged that low-for-long interest rates could exacerbate Canada’s household debt problem.

Poloz will let you know when he disagrees with the finance minister. The NDP’s Guy Caron (Rimouski-Neigette–Témiscouata–Les Basques) brought up a recent quote by Finance Minister Jim Flaherty calling the Fed’s bond-buying program “bad policy” and, essentially, equating it to printing money. Does the governor agree with the finance minister? The governor aptly avoided answering that question directly but had no qualms saying the Fed’s asset purchases helped the U.S. economy on the margins. Answering another question, Poloz also refuted the idea that quantitative easing drives up government debt. The practice, he noted, consists in the central bank buying up government debt that has already been issued and purchased by investors.

The strength of the loonie compared to the U.S. dollar is two-thirds of the reason why Canadian exports aren’t very competitive. So said the deputy governor in response to a question by NDP Finance Critic Peggy Nash. The remaining one-third of the reason, he said, is sluggish competitiveness. But competitiveness overall is, in turn, only one factor why exports aren’t growing, Poloz and Macklem said. The other main factor is that the recession hit Canada’s non-commodity export sector so hard that a lot of firms shut down or shrunk. That trend seems to be reversing but it’ll take time to rebuild capacity.

There are “pockets” of skill shortages and there is a looming labour shortage. The NDP’s Murray Rankin (Victoria, B.C.) wanted the BoC to weigh in on the thorny issue of skills shortages. Where does the Bank of Canada stand on such a thorny issue? The governor gave a very cautious answer: There are “pockets of shortages,” he said and Canadian companies regularly say that skills shortages affect their ability to meet demand. The governor could not, however, put his finger on just how large an issue this is. But the latter is, after all, the core of the controversy. Is this a sectorial or regional issue or is it a national issue? Those who argue it’s not a national affliction generally point to stagnating wages as evidence that there is no shortage of supply of people who can do whatever jobs Canadian employers need them to do. Others suspect it’s something other than a plentiful supply of qualified workers that is really holding down wages. But if the BoC is equivocal on the skills gap, it is clearly worried about a looming labour shortage due to baby boomers hitting retirement. The number of Canadians workers has historically been growing at one per cent rate, said Macklem. As the elderly reach freedom-65, though, the rate of expansion of the Canadian workforce is heading toward 0.5 per cent.