Poloz defends bank’s decision
Governor says ‘ credibility intact’
It has been a ground-shifting few months for the Bank of Canada.
As the tumble in global oil prices continued to gather momentum late last year, central bank governor Stephen Poloz was already moving monetary policy away from a forward guidance stance on interest rate changes.
Then, on Jan. 21, he went even further: cutting the bank’s trendsetting lending level — at a time financial markets and almost all economists still expected rates to eventually rise — and calling it “insurance” for Canada’s energy sector.
On Thursday, the governor defended his recent decisions — himself raising the issue of “credibility ” at the central bank.
“We knew that financial markets would be surprised by the move in January, and we generally prefer to avoid surprises. But we will do what is necessary to fulfil our inflation- targeting mandate,” Poloz told the Canada- United Kingdom Chamber of Commerce in London.
“Ultimately, our credibility will hinge on how well we meet our mandate over extended periods of time,” he said. “Measured this way, it is clear to me that our credibility is intact,” he told the audience.
Now, with crude prices and market volatility appearing to stabilize, Poloz is re- emphasizing the Bank of Canada’s core mandate of keeping inflation on target.
While the aim is to keep the annual rate of price increases as close as possible to two per cent — the midway point between one per cent and three per cent, its not- too-hot, not- too- cold comfort range — words and actions have accounted for a great deal of the institution’s credibility over the years.
So, when Poloz and his policy team in January dropped the bank’s key rate to 0.75 per cent from one per cent — a level untouched since September 2010 — it came as a shock, leaving many wondering “what’s next?”
But Poloz on Thursday questioned whether “very low, long- term interest rates” and recent financial market volatility “represent an erosion of central bank credibility.”
“It probably won’t come as a surprise to you that I would say no. Central banks are doing their jobs in a very challenging setting.”
Among those recent challenges was the unforeseen collapse in global oil prices, an event that has thrown federal and provincial bud- gets, and energy- reliant industries, into a tailspin — hitting Alberta the hardest and Newfoundland and Saskatchewan to a lesser extent.
“This shock surprised everyone, and the fact that it is so large and happened so quickly means that many of us have had to work hard to fully grasp all the implications,” he said. “Central banks around the world, including the Bank of Canada, reacted to this environment with policy announcements that weren’t fully anticipated by investors.”