OTTAWA – Stephen Poloz is getting plenty of advice on his first day as head of the Bank of Canada, but not from the prime minister or the finance minister — publicly at least.
The 57-year-old governor was officially welcomed to the post by Prime Minister Stephen Harper at his Langevin Block office Monday, but was given no suggestion as to what the government expects of him other than work toward “growth and long-term prosperity for the Canadian people.”
Poloz responded that it was a “real privilege.”
The prosaic ceremony, which included Finance Minister Jim Flaherty, belied one of the most critical financial and economic posts in the country, and the considerable challenge Poloz faces replacing Mark Carney, who broke the mould for Bank of Canada governors in terms of policy-making and communications acumen.
Still, there was no scarcity of advice for the former Export Development Canada head, including a survey by the Chartered Professional Accountants of Canada that suggests the country’s leading CAs basically want him to follow Carney’s lead.
In the survey of 322 accountants in senior corporate positions, three quarters said he should stay the course.
“Most of the executives surveyed are not looking for a shakeup,” explained Kevin Dancey, the group’s chief executive.
But some analysts believe the time for a minor course adjustment has come.
Despite a relatively strong start of the year, the outlook for the economy remains for weak, below potential growth. As well, underlying inflation is threatening to break through the lower boundary of the bank’s broad one-to-three per cent range. Headline inflation, which is what consumers deal with, is already there at 0.4 per cent.
“We’ve got a fragile global backdrop, we’ve got volatility in energy prices, we’ve got business confidence softening, government sector making cutbacks and we’ve got a housing market in correction, it’s difficult to image how the economy over the next 12 months is going to accelerate,” said David Madani of Capital Economics.
“I think the bank should seriously be thinking of ways it can start supporting the economy.”
His advice is that Poloz consider dropping the bank’s mild tightening bias — the forward looking guidance to markets that the next move will be higher interest rates — as a possible precursor to actually cutting rates.
Such a move would put downward pressure on the Canadian dollar and help boost exports. The drawback is that it might entice more Canadians to borrow more at a time when household debt in terms of income is already at an all-time high. But Madani believes it will soon become apparent that consumers are tapped out and that the housing market will continue to correct.
Bank of Montreal chief economist Doug Porter also believes the hawkish bias has outlived its usefulness, noting that “the market has long since stopped listening.”
Porter says Poloz faces two distinct challenges.
The first is trying to replace Carney, particularly the respect his words carried with markets and his counterparts around the world.
The other is the policy rate which is set at one per cent leaving the bank little room to cut further even if it felt safe to do so. The housing market may be cooling, but debt remains at sky-high levels and the bank may be fearful of making a bad situation worse. Pointedly, the survey of accountants found 84 per cent urging Poloz to continue encouraging Canadians to reduce debt.
The first real opportunity for Poloz to signal where stands comes Thursday, when he testifies before the Commons finance committee.
He also has a speech scheduled for two weeks later, but it won’t be until July 17 that the Poloz bank holds its first policy-setting meeting.
That gives the new governor two more employment reports, both in Canada and U.S., and one more overall economic growth report before he has to pull the trigger, or not.
“I think it will depend on what happens in the next six weeks,” said Porter. “If things turn sour they would have ample justification to (change the bias),” he said. “There’s nothing to be gained by making a splash, especially if the situation isn’t broke.”