Poloz Defends Need for Deep Rate Cut to Counter Virus Impact
Poloz Says Canada Rate Cut Needed to Shore Up Confidence
(Bloomberg) -- For Bank of Canada Governor Stephen Poloz, it’s all about confidence.
After slashing interest rates by half a percentage point on Wednesday, Poloz defended the Bank of Canada from the criticism its most aggressive move in more than a decade may fuel already dangerously high household debt levels, while doing little to solve the underlying problems associated with the spread of the coronavirus.
The governor, who steps down in June after seven years at the helm of the Ottawa-based bank, acknowledged monetary policy can’t address supply chain disruptions. But he said it can prop up sentiment, helping to prevent a temporary crisis turning into a more long-lasting slowdown.
“There is a real risk that business and consumer confidence will erode further, creating a more persistent slowdown, especially given recent declines in stock markets,” Poloz said Thursday during a speech in Toronto. “For its part, monetary policy can contribute by buffering” these effects.
The domestic debate over the Bank of Canada’s decision -- which included a pledge to cut again if needed -- mirrors a global discussion on the usefulness of monetary policy to address the shock, at a time when central banks have little ammunition to begin with.
Poloz argued the supply shock could quickly turn into a demand shock if it begins to undermine spending plans by companies and individuals, making it imperative for policy makers to get ahead of any spillover.
“We made a decision this week not to dip our toe in the water but rather to make a decisive and clear move so that people get immediate impact,” Poloz told reporters after the speech. “We believe we’ve done a lot there to cushion a blow. We don’t know how big the blow might be.”
‘Sufficient’ Downside
Wednesday’s cut marked a dramatic reversal for Poloz, who had been one of the few central bankers over the past year to resist lowering borrowing costs -- partly because such cuts could further elevate the nation’s already high household debt levels and fuel hot housing markets in cities like Toronto and Montreal.
But that changed with the spread of the coronavirus. Downside risks to the economy are now “more than sufficient” to outweigh continuing concern about financial vulnerabilities from cheaper money, Poloz said. In fact, he flipped the argument on its head -- as he did when he cut rates in 2015 -- arguing the move may actually improve financial stability.
“Indeed, declining consumer confidence would naturally lead to reduced activity in the housing market,” he said. “In this context, lower interest rates will actually help to stabilize the housing market, rather than contribute to froth.”
In the decision Wednesday, officials said the virus has driven economic activity down sharply in some regions, disrupted supply chains, pulled down commodity prices and prompted a repricing of risk that has tightened financial conditions. In his speech, Poloz put much of the emphasis on a major unknown: the impact the crisis could have on broader confidence levels.
Coordination Premium
“It is possible that the global economy will snap back quickly after the health professionals have managed the situation and conditions have returned to normal,” Poloz said. “However, the outbreak and its effects could be more persistent. Consumer and business confidence could be set back for a longer period of time, causing economic growth to slow more persistently.”
The Bank of Canada also has been contending with a slowing domestic economy that may have forced the central bank to cut regardless, Poloz conceded, while hinting the Federal Reserve’s 50 basis point move on Tuesday influenced the scope of his policy shift this week.
In fact, the level of collaboration among Group of Seven central banks is as high as he’s seen since becoming governor in 2013, even as each nation tackles the coronavirus crisis in its own way, Poloz said.
“To us, that was also a positive benefit -- the fact that the Fed went on Tuesday and we knew we were going the very next day,” he told reporters. “There is in effect a coordination premium that you get by acting in concert.”
To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net;Erik Hertzberg in Ottawa at eschmitzhert@bloomberg.net
To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier, Stephen Wicary
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