Economic analysis

Carolyn Wilkins on central banking in a slow growth world

The senior deputy governor of the Bank of Canada on the housing market, the fintec revolution and why it’s cool to have her signature on Canadian money
Carolyn Wilkins. (Photograph by Erin Schaff)
Carolyn Wilkins. (Photograph by Erin Schaff)
Photograph by Erin Schaff

Carolyn Wilkins was a 13-year veteran of the Bank of Canada when, in 2014, she was appointed to the job of senior deputy governor, making her the bank’s highest-ranking woman ever. While she is perhaps most recognizable from sitting shoulder-to-shoulder with governor Stephen Poloz for interest-rate announcements, Wilkins has also begun to shape how the bank communicates with the public. Maclean’s spoke with Wilkins while she was in Washington last week for the spring meeting of the IMF.

Q: What did you bring to this job that’s different from before?

A: Well, I’ve certainly followed some excellent senior deputy governors so it’s an interesting job to step into. One of the opportunities that the board of directors of the Bank of Canada took was to split the senior deputy governor job to take out the responsibilities of chief operating officer. That was a perfect opportunity to mould the job of senior deputy governor to be more focused on key policy issues. At the same time, our strategic plan was coming in. The contribution that I made in the leadership capacity was really on that. If you look in that plan, you’re going to see a lot of the things I believe are central to the bank’s success over the next couple of years. Those relate to learning the lessons from the financial crisis and a focus on fundamental research that’s attacking key issues, for example the fintec [financial technology] revolution, but also what’s happening in emerging markets like China and the transition we’re going through domestically. The other thing the governor and I are focused on is the culture of the bank and making it even more outward facing than it is.

Q: How are you doing that?

A: A very tangible set of actions we took related to how we publish research papers. We made it clear that staff research papers  reflect the views of the staff themselves and aren’t necessarily consistent with governing council views. That would contribute to transparency about the kinds of discussions and debates we have internally.

Q: Why is that important?

A: If you’re in your own four walls with people who think like you, you risk groupthink. Confirmation bias and groupthink can be dangerous. It can lead to wrong policy outcomes, and you can miss really good ideas.

Q: Some argue central banks should quietly take care of the plumbing in the financial system. Yet since the crisis, they’ve been the focus of everybody in financial markets. What’s the central banks’ proper role in public debate around the economy and policy?

A: I’m just going to talk about Canada. Clearly our primary function on the monetary policy side is to achieve low and stable inflation. My view, though, is that in doing that you need to think of a lot of very broad issues, whether it’s the economy’s potential to grow in a sustainable way, productivity growth, whether financial imbalances are brewing or whether there are financial innovations taking place that affect what you’re trying to do. Even with a narrow mandate central banks need to look at a broad spectrum of issues.

Q: Do you ever worry about the Bank of Canada becoming politicized?

A: Throughout its history the bank had a very excellent relationship with governments. It’s been very clear that the central bank had independence with respect to the monetary policy and is trusted to give its best views on issues. One of the areas that may have developed since the crisis is this idea that central banks can fix every problem. They can’t. Monetary policy works to affect demand, and it’s something that is needed to ensure low and stable prices. At the same time, it’s not the only game in town. I like the fact there is increased recognition that other policies, like fiscal policy, like structural policies, can be brought to bear to underpin Canada’s macro economy, and global economies in general.

Q: The IMF says Canada has gotten the policy mix right. Why is that important?

A: There are concerns about the effects of persistently low interest rates and the quantitative easing that other countries have done, in terms of increasing risk-taking by financial market players and individuals. If fiscal policy can do some of the heavy lifting, that’s a positive thing. Fiscal policy at low interest rates is also just more effective. In a world where growth is going to be structurally slower because of demographic changes, monetary policy can’t fix that. If we want sustainable growth, we need to boost productivity, not only in Canada [but in] the global economy. That’s the only place growth can come from.

Q: You’re the first woman to have such a post at the bank. Do you see yourself as a pioneer?

A: Being the senior deputy governor of the bank is a responsibility and an honour that I take very seriously. The fact I’m a woman, if I can at some point be a role model to young women, and young men, in the sense of them seeing that economics and public policy-making can be fun—at least as fun as I think it is—then that will be very positive for me.

Q: Do you feel any responsibility as a role model?

A: Well, the biggest responsibility I have is to fulfill the bank’s mandate to safeguard the economic and financial well-being of Canada. My responsibility, with the governor, is to make policy decisions that will stand the test of time, not policy decisions that are popular on any day. If we can demonstrate that, then by extension, that’s a good role model.

Q: This is not necessarily a question associated with the last line of discussion, it just seems right to ask—why is the central bank pushing to put a woman on one of the bills now?

A: The images that appear on bank notes are the decision of the government. It was an ask from the Prime Minister and the Bank of Canada is very pleased to be part of this initiative. I like to think of Canadian bank notes as being little pieces of history. You look at them, they tell a story. Having a woman on a bank note just expands the type of stories we can tell that are really important to Canada’s history. Canada’s a very diverse country—not just diverse by gender, but also by different cultures and different experiences. The more that we can share those experiences, the better.

Q: Who would you like to see on a bill?

A: I don’t have my personal favourite. There’s just this embarrassment of choice.

Q: Aside from the Queen, there is a woman on money now: your signature. How cool is that?

A: I’ll tell you how cool it is, at least in some people’s eyes. I have a son who just turned 18. You can imagine, as his mother, there are limited opportunities for me to appear to be cool. Having my signature on the money, he thinks that’s pretty cool.

Q: Were you nervous?

A: No, I just signed it. The hardest thing is you’re not allowed to dot the I’s because they can’t print the dot. I don’t look at it that much, but I’m happy with it. It looks like my scrawl.

Q: Let’s talk about the housing market. The bank expects a soft landing, yet prices are soaring in Toronto and Vancouver. Is there risk of a hard landing?

A: You can’t really look at the Canadian housing market as one market. We see a trifurcation. That’s a fancy way of saying that in provinces dependent on commodities, particularly energy, we see a market slowing and even some contraction. You see some more vigorous activity, to say the least, in Toronto and Vancouver. Then everywhere else it’s flattened out quite a lot. So to speak about one market just doesn’t work.

We’ve noted that household indebtedness and the housing market is the No. 1 domestic financial system risk. It still is. The important thing to keep in mind is: what are the right tools if you decided you need to keep your eye on it? Which we obviously are. Monetary policy is the wrong tool for a couple of reasons. One, it would affect the entire economy, where the issues, if there are any, are isolated. The second reason is it’s a vulnerability that may be building, but we wouldn’t want to be the trigger that would mean that risk actually materialized. The best thing we can do is to support the transition of the Canadian economy and leave it to the authorities who have the macroprudential tools related to the housing market. The latest tightening in those tools just came into effect, so it’s really early days to tell what effect those actions from the government will have.

Q: How long can interest rates stay at this level?

A: Well, with respect to Canada, the overnight rate is quite low, and it’s going to stay—it’s going to be set according to where we think it needs to be to achieve our inflation target. I can’t tell you how long that would be. Other countries who have deeply negative nominal interest rates, in Europe and more recently Japan, there may be time limits with respect to how long they can stay significantly negative because people may find it better to store cash to avoid that negative return. So far it hasn’t been a big issue, but when you look at the analysis that has been done by the bank, that would be a constraint to think about.

The more important thing to think about is not what happens if they stay low, it’s where would they go. If you’ve got slower potential global growth then the neutral rate of interest is lower than it was before. And you would notice in our monetary policy report, we lowered the neutral rate to be in a range of 2.75 to 3.75 per cent. What that means is that the returns and the search for yield may continue, even as conditions normalize.

Q: The Bank of Canada put some emphasis on the fact the weaker exchange rate has helped non-energy exporters. Does that legitimize the notion in financial markets that the world’s major central banks are in a currency war?

A: I find the narrative somewhat misses the point that the Bank of Canada sets the interest rate in a way to achieve our inflation target, and the outcome of that is adjustment in a wide range of asset prices, of which one is the exchange rate. What’s being totally missed, though, is that the world is better off if countries take monetary policy actions that support their economies. It’s true that our exchange rate goes up and down and that has implications for exports; at the same time, it’s good that the U.S. takes monetary policy actions that mean it will continue to grow at a sustainable pace. We benefit from that too.

Q: Let’s talk about the fintec revolution. Why is that issue interesting for you?

A: It’s a discussion that has implications for central banks and the financial system, either because we oversee payment clearing and settlement systems, and we may want to adopt some of this technology, or just because it has implications for how we conduct monetary policy or how the financial system’s risks are propagated through the system. My view, one that’s shared by governing council and my colleagues, is that we need to get in early to understand this technology. We need to look under the hood and see it as it develops.

Q: Do you foresee a day when the Bank of Canada gets behind a crypto currency of some kind, such as BitCoin?

A: I think that it’s really early days to speculate on where that kind of activity will play out. What I can say, though, is that we are actively researching the merits and disadvantage of a central bank issuing e-money.

Q: You can’t get your signature on e-money.

A: (Laughs) I haven’t thought about that. The other questions were probably more important, so we’ll have to work that one out.


*Correction: An earlier version of this post incorrectly identified Carolyn Wilkins as the deputy governor of the Bank of Canada. Her correct title is senior deputy governor. This version has been corrected.