Why big changes aren’t in the cards as Boc’s Macklem era begins

Central bank can’t do much more at this stage of recovery, Kevin Carmichael says.

Stephen Poloz concluded the public portion of his tenure as Bank of Canada governor on

May 28 with a visit to the Senate finance committee, where he told senators he was confident the central bank’s response to the COVID-19 crisis was working, but that policy-makers could do more if required.

Now for the denouement.

In an uncanny bit of synchronicity, Poloz’s last day on the job was spent overseeing the completion of the Bank of Canada’s latest round of interest rate deliberations.

Typically, the work is over by the early evening, so the new policy statement will be posted Wednesday at 10 a.m. on the central bank’s website. But that part will be Tiff Macklem’s responsibility. Poloz’s seven-year tenure ends at midnight.

In all likelihood, the outgoing governor will quietly walk off the stage.

Since March 4, Poloz has led the most radical phase in the Bank of Canada’s 85-year history. He and his five deputies dropped the benchmark interest rate by 1.5 percentage points, to effectively zero, and set up programs that have so far purchased financial assets worth almost $300 billion, more than tripling the size of the bank’s balance sheet.

“We have succeeded in restoring good functioning to many key financial markets that had been showing signs of significant stress,” Poloz told the Senate committee. “The combination of aggressive fiscal action by governments and monetary stimulus by the bank, supported by our actions to ensure well-functioning financial markets, will create the best possible foundation for the recovery period.”

That’s not how generals talk when they are preparing to return to the battlefield. More could be needed eventually, but with markets stable, there is little else the Bank of Canada can do at this stage.

“It will be important for the governing council to show continuity of leadership and predictability of policy in highly uncertain times,” Veronica Clark, an economist at Citibank, said in a note to her clients on Monday. “The policy statement should reiterate the Boc’s commitment to supporting the economy and financial system as necessary, but will likely also acknowledge slowly rebounding activity as the country starts to reopen.”

All the backward-looking data are terrible, and will only get worse as they catch up to what happened in April and May.

Statistics Canada last week reported that Canada’s gross domestic product shrunk at an annual rate of 8.2 per cent in the first quarter as the lockdowns took hold. The collapse accelerated into the current quarter, probably to an annual rate of about 40 per cent, according to Royal Bank of Canada’s economics unit. We’re experiencing the most brutal recession ever.

But it remains possible that the severe pain will subside relatively quickly. RBC sees economic growth at annual rates of 35 per cent and nine per cent in the third and fourth quarters, respectively. It will take time to get back to where we were at the end of 2019, perhaps a year or longer, but a depression is the base case of only the most pessimistic forecasters.

National Bank’s “back-to-normal index,” which uses Google mobility data to track store and office activity, is still a long way from its early February baseline, but the measure has been crawling steadily higher since midapril. The recovery has begun, although it’s too early to know if it will last or if the economy can generate enough momentum to climb out of the crater it’s in.

With policy essentially set for now, the central bank might instead try countering excessive negativity by pushing back against a broad embrace of the most dire scenarios of the future.

The word “depression” has easily slid into the discourse about the crisis, even though it remains a low-probability event given the scale of the rescue efforts by governments and central banks. Poloz’s testimony at the Senate finance committee last week was a battle against worst-case scenarios. As he told his interrogators, the data suggest the Bank of Canada’s best-case outcome — a sharp, partial rebound followed by a slower grind back to pre-crisis output levels — is the most likely result at this stage.

To be sure, Poloz’s confidence is rooted in an instinctive notion of how the next year will unfold. He foresees a “surge” in entrepreneurial activity, as individuals and smaller companies take advantage of the destruction caused by the lockdowns to start new profit-making endeavours.

“Resources are being freed up because of sudden destruction, that’s how creation happens,” Poloz said in an interview last week. “If you were to get laid off, what an opportunity for you to take those nuggets and do them better, get people to outsource to you. That’s the kind of thing I’m talking about. It will happen in spades.”

He said that “blossoming” will require “really friendly” policies, suggesting the outgoing governor would have been an advocate for a long period of low interest rates. “Those are the jobs of the future,” he said. “Anyway, that’s somebody else’s job.”

Financial Post

It will be important for the governing council to show continuity of leadership and predictability of policy in highly uncertain times.