National Post (National Edition)
Poloz, Carney can do no more
Plans to leave central banking still in place
The struggle to stop a global recession has reached a new level of urgency, but not so much so that a couple of key fighters feel compelled to extend their tours of duty.
Mark Carney, the Bank of England Governor, ended his seven-year run on Threadneedle Street as planned on March 13, even as COVID-19 continued its spread throughout Europe and North America.
And Stephen Poloz, who replaced Carney as Bank of Canada governor in 2013, told a press conference in Ottawa that the coronavirus crisis hasn’t caused him to rethink his intention to retire when his term ends in early June.
“We are a team at the Bank of Canada,” Poloz said. “We have an excellent team. I have confidence in that team. So I do not intend to delay my retirement date, no.”
Both are going out in a blaze of glory.
As with the early phase of the financial crisis in 2008, the central banks are doing a lot of the firefighting.
Surprise interest-rate cuts by the Bank of England and Bank of Canada bookended new stimulus from the European Central Bank last week. Those three joined their counterparts from the United States, Japan and Switzerland in a joint operation just as financial markets in Asia began to open on Monday to ensure each has ready access to U.S. dollars. Soon after, the Americans dropped the motherlode: the Federal Reserve slashed its policy interest rate by a full percentage point, dropping it to zero, and said it would purchase at least US$700-billion worth of bonds and mortgage-backed securities to put even more downward pressure on commercial and retail borrowing costs.
“The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook,” the Fed’s policy committee said in a statement.
The rolling announcements — most of them unscheduled and featuring bigger-than-usual incremental changes to achieve maximum effect — make up for the letdown that followed the conference call on March 3 held by the Group of Seven finance ministers and central bankers. Investors were anticipating a joint stimulus announcement by an assembly of most of the world’s richest countries. All they got were promises, prompting a sharp drop in equity prices when markets opened in North America. The Fed watched this unfold for less than half an hour before cutting interest rates. Policy-makers around the world have been fighting historic volatility in financial markets ever since.
Their battle continued Monday. The Fed’s extraordinary intervention failed to prevent another startling drop in the value of global equities, nor did interest-rate cuts in New Zealand, South Korea and Hong Kong. The Bank of Canada jumped back into the fray with new measures aimed at keeping fear from paralyzing core financial markets. Canada’s central bank said it would purchase up to $500-million worth of mortgage-back securities every week “for as long as market conditions warrant,” an attempt to calm a market for an asset that influences mortgage rates. The Bank of Canada also pledged to accept a wider range of securities as collateral from banks in need of short-term loans.
It should be clear to everyone in power by now that investors were listening when a consensus formed early in the coronavirus crisis that lower interest rates could do little to stop a recession caused by mass quarantines and public-health advisories to stay inside.
A senior executive at a Canadian maker of medical devices told me his company was on the verge of cutting 30 per cent of its 1,600 positions because demand had vanished. (The executive requested anonymity because the company hadn’t yet told its staff what was coming.) That’s the best-case scenario. It’s also possible the company, which had been growing rapidly for years, could be bankrupt by fiscal yearend, the executive said.
Tens of thousands of executives are facing similar circumstances. It’s one of the reasons that most economists have concluded an economic downturn is inevitable. Citibank’s Veronica Clark on Monday said she thinks Canada’s gross domestic product will decline at an annual rate of 1.6 per cent in the second quarter, dropping her outlook for growth in 2020 to 0.7 per cent.
That’s just one country. And yet the response of fiscal authorities has been inconsistent.
Carney acted in concert with Boris Johnson’s government, which pledged to boost spending by 30 billion pounds ($52 billion) hours after the Bank of England’s interest-rate cut. Others have been hesitant. Bill Morneau, Canada’s finance minister, summoned Poloz and Jeremy Rudin, the country’s top banking regulatory, for a public show of force on March 13. But only Poloz and Rudin came with significant announcements. Morneau promised he would exploit the Government of Canada’s significant “fiscal capacity” this week.
The leaders of the G7 on March 16 held a conference call and afterward said they “are committed to doing whatever is necessary to ensure a strong global response through closer co-operation and enhanced co-ordination of our efforts.” The pledge had little, if any, effect on market sentiment. The larger G20, which assembled to fight the financial crisis in 2008, is nowhere to be seen this time around.
“Investors are clearly looking for fiscal policy to respond with the same urgency central banks displayed over the weekend,” Joseph Nye, an economist at Royal Bank of Canada, said.
Central banks are less constrained by politics. But their relative freedom to operate might not mean as much as some people think. Powell on the conference call March 15 said “we think we have plenty of power in our tools,” but the Fed was skeptical about negative interest rates, which have been tried in Europe and Japan. Poloz made similar comments: “I don’t think I’m alone among central bankers who like the idea that much,” he said. “It’s not a happy place for the banking system.”
Both Powell and Poloz stressed that while they could stabilize their respective economies, the politicians are the ones with the power to reverse the recession. The reason Carney and Poloz needn’t postpone their retirements is because they’ve already done all that they can.