OTTAWA – New Bank of Canada governor Stephen Poloz is signalling there will be no shift from the current low interest rate policy under his leadership, at least in the short term, despite fears it is creating imbalances in the economy.
Although keeping rates low for a long period has a distorting impact on the economy, including triggering excessive borrowing, Poloz says the central bank must also consider the risk to the fragile economy of raising rates too soon.
“My concern is we do the right thing so this (weak economy) doesn’t last for a generation,” he told the Commons finance committee Thursday.
“For now … we don’t see that those risks (from low rates) are manifesting themselves in a threatening way.”
Scotiabank economist Derek Holt said if anything, Poloz’s testimony suggests that he may be even more dovish toward monetary policy than Carney, pointing out the emphasis on the bank having a role “nurturing” economic growth.
“A speech that is all about ‘nurturing’ and the Bank of Canada’s role in building confidence through this process suggest a policy leaning toward at least a less hawkish (bank) than under the last months of Carney’s tenure,” Holt wrote in a note to clients.
He said one possible ramification may be that the bank may soften, or drop altogether, its persistent warning that the next move will likely be higher interest rates at its next policy pronouncement on July 17.
Several other analysts said it was probable that July would bring no material change in the bank’s policy to keep the trendsetting interest rate at one per cent, leading to some of the most favourable borrowing conditions in many decades.
The Canadian dollar jumped more than a penny to 97.85 cents US following the testimony, but analysts said the prime cause was U.S. dollar weakness.
The two-hour appearance was a first chance for MPs to probe the new governor, who took command of the central bank this week, for any divergence with his predecessor Mark Carney, who takes over the Bank of England in July.
Poloz provided some evidence that he doesn’t see the world exactly the same way, and also that he may be a different governor, one more likely to restrict his views to strictly bank business than his free-wheeling predecessor
For instance, he said he would not characterize the build-up of cash reserves by corporations as “dead money,” as Carney did in urging firms to invest.
Noting Carney himself has since declared it “resurrected,” Poloz said he would characterize firms as having “healthy balance sheets.”
“And that’s a good thing,” he said. “The process (of recovery) would be much more difficult if foreign demand is building, and our confidence gets up, and we don’t have balance sheet available to do the job, then we have a different problem. One of the most importance ingredients to getting the investment momentum we expect to see is having a healthy balance sheet and being ready.”
Asked about Carney’s publicly stated concern for income inequality, Poloz said the issue is of interest, but: “As a central bank, we only have a modest influence.”
The new governor did show signs of having some of his predecessor’s sense of flair, however, describing the current recovery not as a normal climb-back from a deep recession, but something akin to a “post-war reconstruction.”
The 2008-09 crisis was so damaging that the world needs to reconstruct its financial system, he explained. For Canada, it put some firms out of business and caused others to permanently downsize.
“In effect, the recession caused a significant structural change in the Canadian economy,” he said. “In short, we need to see the reconstruction of Canada’s potential, and a return to self-sustaining, self-generating growth.”
The first step to that process is a recovery in export markets, something he said was under way, notably in the United States and Japan.
He also agreed with his predecessor that Canada’s commodity riches are a net benefit to the economy, dismissing even his own 2005 concerns about Dutch disease as no longer applicable.
Poloz, who had been a surprise pick for governor by Finance Minister Jim Flaherty, also dealt directly with the issue of the bank’s independence, particularly over a recent government action that requires Crown agencies, including the central bank, to in essence clear hiring decisions and salaries with the Treasury Board.
That will not in any way impact the policy independence of the bank, Poloz insisted.
“I see a clean separation between administrative independence and monetary policy independence,” he said.