Crisis lessons

Stephen Poloz is looking back to 2008 to head off a housing or banking crash.

Canada’s central bank is studying ways to incorporate lessons learned from the 2008 global financial crisis as it prepares for the renewal of its inflation-targeting mandate next year, governor Stephen Poloz said.

The Bank of Canada’s goal of targeting inflation, today at a rate of two per cent, must come ahead of financial stability goals, Poloz said, according to published remarks of a speech he’s giving Monday in Washington. The bank is also conducting research into the potential cost and benefits of using monetary policy to head off a housing or banking crash, Poloz said.

The central bank’s five-year policy agreement with the government is due for renewal next year. Poloz reiterated Monday the central bank should be the “last line of defence” against threats to financial stability, which must first be addressed by individual borrowers and lenders, regulators and officials who craft macroprudential policies.

“Even in extreme conditions, when financial stability risks constrain monetary policy from achieving the inflation target over a reasonable time frame, a central bank would want to ensure that all macroprudential options were exhausted before trying to address those risks with monetary policy,” Poloz said in remarks to the National Association for Business Economics.

The Bank of Canada’s research includes working on new models that better track the relationship between financial markets and the economy and studying how other central banks curb financial instability, Poloz said.

“It is enormously difficult to capture bubble-related behaviour,” with regular methods of tracking the economy, he said. “We put aside the idea of engineering the perfect policy and focus instead on the more realistic goal of finding an appropriate policy setting, given the risks and uncertainties.”

Poloz cited his own interest-rate reduction in January as one example. That move was needed to keep inflation close to target after a drop in oil prices, even though it stoked concern about a surge in consumer debt and rising home prices in Toronto and Vancouver, he said.

“I’m not trying to diminish the threat posed by elevated household debt. We are continuing to watch this closely,” he said. “In the current context, getting the economy back to full capacity with inflation on target is central to promoting financial stability over the longer term.”

Poloz’s speech Monday during Canada’s Thanksgiving holiday echoed remarks he gave Saturday at an International Monetary Fund meeting in Lima. Poloz didn’t comment in either speech about his next rate decision on Oct. 21, where economists predict he will keep the key overnight lending rate at 0.5 per cent.