In six years as governor of the Bank of Canada, Stephen Poloz has tried to guide Canada’s economy back to calm waters in the endless wake of the 2008 global banking crisis. But trouble won’t stay away, and lately it’s the prospect of a global trade war that has him worried. He spoke to Maclean’s senior writer Paul Wells a day after announcing he won’t raise interest rates because the economy still needs help.
I want to begin by thanking you for not raising interest rates yesterday.
It was my pleasure. I was happy to take care of that for you.
It was the third time you have passed up a chance to raise interest rates. What are the factors that go into that calculation?
Really, the way this works is policy is made roughly two years ahead of time. The fact that inflation’s on target today means you were doing the right things two years ago. But now we’ve got some forces acting that are a bit new: another oil shock, but also, what’s more important, I think, is a global shock, which is the trade war.
Think of yourself as a company. You rely on a trading system. And suddenly it’s in doubt. People are putting tariffs on things—steel, aluminum—and then counter tariffs on lots of things. So you don’t invest that extra money at a time when you really ought to or want to. You stop or slow down, and it’s done that all around the world.
In your announcement, you said that there are four broad baskets of policy considerations that affect your call: oil, trade, housing and ﬁscal policy.
Oil is the most obvious one. In October, November, December, not only were world oil prices rather weak, we also had a situation where Canadian oil was selling at a huge discount to the world oil price. What’s happened now is that oil companies in Alberta in particular are saying, well, those investments we had in mind, we’re putting those off for a while.
I already talked about trade, and we have the special consideration here, not just the global trade war but the uncertainty about the new NAFTA, which is now in doubt around ratiﬁcation. So that delays investment further.
The third thing was housing. We had a huge run-up in housing. There was fear of missing out, there was speculation in both Toronto and Vancouver, foreign buyers, all kinds of things fuelling that. And that speculation has come out of the system now, so what we’re waiting for is for the froth to completely be gone in those two markets and we’ll be back to basics.
Have governments got a handle on what was overheating those markets, or has it been a consumer-driven relaxation?
So the answer to almost any question that you could frame up would be yes. And because all of those things matter. We all know Vancouver’s got a shortage of places to build houses. In Toronto it’s less obvious, but there is a supply issue. So that’s why prices would go up in the ﬁrst place. But of course, if you’re sitting there thinking, well, in the next three or four years I’m going to buy a house, and you see prices going up 10 per cent per year, fear of missing out takes over. So this is what was going on in Toronto and Vancouver, and it was fuelled as well by foreign buyers.
So the policies that were put in place locally were to tax foreign buyers to try to limit some of that fallout. And at the same time, roughly, the new guidelines on mortgages came in. Those things weren’t intended to stop prices from rising. They were aimed at making sure that people who did borrow borrowed safely, and that they would be resilient if the economy had a shock. And they seem to be working very well that way.
A little bit more than a year ago, in 2017, you said we’re quite close to “home” and getting closer. What does home look like, and why aren’t we quite there yet?
So home is the place where inflation is on target, running at two per cent, and the economy is operating at its full potential, unemployment’s about as low as you can expect it to be. We were home through all of 2017 and most of 2018. The only thing that looked odd was that we were only home because interest rates were still extraordinarily low by historical standards.
That suggested to us that there were headwinds still, forces acting on the economy that are continuing, and we need lower interest rates to counteract them and keep us in that neighbourhood. We’ve analyzed all that and concluded that it’s a detour. It’s in the order of six months, a bit more.
Folks in my line of work sometimes talk about the looming recession. Is there a looming recession?
No. And I don’t know why you talk about looming recessions.
Have you met anyone in my line of work?
All we’ve got is here and there an imbalance that we’re watching. But there’s nothing to signal that we’re on the verge of anything like that.
Trump has done a few things on tariffs especially that I know preoccupy you. Is there any way that story could turn so sour as to provoke a new global recession?
Oh, certainly. I mean, when we think about the gains in income and living standards that have been created by trade liberalization in the postwar period. To erase even a portion of those would be to risk causing a recession, a global one.
And it’s worse than that in the sense that—just think about what a trade war looks like. We know when you put tariffs on things, it makes people worse off.
So the response to Trump’s initial tariff—retaliatory measures—compounds the effect of those tariffs.
Oh, absolutely it does. I don’t think there’s really a choice because your companies are put on an unlevel playing ﬁeld, and of course everybody’s saying well, now, you’ve got to somehow keep us even. And I mean, that’s politics. The only real way out of it is for people to understand that any war is counterproductive.
Did you worry about the shoes you’d have to ﬁll when Mark Carney left?
No, not really. I had the advantage of having grown up in the Bank. I had a sense of what the role looked like from the inside. But there’s no question—I mean, do you remember who it was who replaced Wayne Gretzky when he retired?
No. I wouldn’t know.
That’s what I’m saying. I run into people on the street and they ask me, “Hey, how’s Mark?” And I’m like, “Great, and I’m doing okay, too.”
I assume you speak to him, as central bank governor to central bank governor.
The level of coordination among bank governors is higher than usual, I expect, in a weird time?
It’s very high. I mean, I would say there’s always been a tradition of that. Basically, every second month, around six to eight weeks apart, and at least the 15 biggest ones have dinner together, and there’s a wide open conversation. And that’s extraordinarily positive. It’s very useful to know just what it is that’s on Jay [Powell]’s mind or Mark’s mind or Mario [Draghi]’s, so that you know what are they wrestling with, what’s next. And you share war stories. So it’s very, very cool.
Is there a feeling of being sort of the groundskeepers during the world’s biggest frat party? There’s this president who is doing wildly unpredictable things when you are the stewards of predictability.
I’m not going to repeat the premise that was in that question. But there’s no question that politics has intruded in many dimensions more than normal. In any given year there’s always some geopolitical risks that erupt, whatever. It’s hardly ever in one of our major countries. So politics has deﬁnitely become a much bigger factor in trying to ﬁgure out what’s going to happen next and what are the risks that we face.
But I think the experience of what we went through after the crisis kind of gave people an exaggerated impression of what central banks can do for them. Our ability to control all these things and keep them under control is kind of a little too lofty in most people’s minds. It’s why we chose inflation targets. The central banks only have one tool, and we can only aim at one thing.
Trump is frequently highly critical of your counterpart at the Federal Reserve, and has hinted that he might constrain the autonomy of the Fed by replacing the Chair.
Do you ﬁnd yourself having to explain why independent central banks are a good thing?
Yes, and here we are.
Why are independent central banks a good thing?
If we’re clear about it, really, we’re in a position to provide a stable macroeconomic environment, and that’s about it. And inflation is the main way to do that. And if you think about that, well, there’s nothing much to argue about there. Central banks were created because there was a presumption that governments would always prefer more inflation, especially toward election times. They would goose the economy. And so central banks were created to guard against that, and it’s the independence that makes sure that that line doesn’t get crossed.
But independence is kind of a relative concept. In Canada we are accountable to Parliament. And yesterday I had to explain everything in a press conference, and that’s all part of the accountability to the public.
I’ll tell you one last thing on independence. When was the last time you were in a Chinese restaurant and you got a fortune cookie that actually meant something to you?
Not nearly often enough.
Okay, so I’m going to show you something. Six weeks ago, I got this at the Mandarin Ogilvie just down the road, and you can read it out to the folks.
“You are independent politically.”
I thought that was quite a stroke of luck, actually. I keep it in my wallet—for a while anyway.
It used to be that the Bank didn’t explain when it wasn’t changing rates.
A governor who I won’t name told me, “Steve, I do all my best writing between the lines.” We don’t do that anymore. We’re trying to be straightforward and clear.
A few weeks ago in Iqaluit you gave a speech that talked about the extent to which services and sophisticated human interaction is a huge chunk of the Canadian economy.
It’s common because of frustration over pipelines to say that Canada’s becoming a bad investment risk because big projects don’t get anywhere. And yet the argument you made is that those sorts of projects are not where the growth is, and they’re not the only consideration when we talk about the Canadian economy.
Oil is our biggest export, and it’s not going to change. But on top of that, where is the new growth coming from? It’s coming from the service side of the economy. We’re talking an economy that’s growing around seven to eight per cent per year. Our economy is over 80 per cent services.
You’re not sure natural resource growth is there in the future, even if we get a pipeline built?
Oh, no, no, no. The growth is more organic growth. The global oil market grows perhaps two per cent per year. And with extra pipeline capacity, we could bump to a higher output level, that’s true.
But on the resource side, the food sector has extraordinary promise. The planet is still growing, and food is a key issue. Simple things like fertilizer, potash, these are big growth opportunities for Canada.
You’re in your last year as the central bank governor?
My mandate ends about a year from now, yeah.
Are you expecting smooth sailing from here to the exit door?
Well, according to our forecast, the answer’s yes.
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