Bank of Canada’s Poloz Sees Era of Low Global Interest Rates
Bank of Canada Governor Stephen Poloz said he expects global interest rates to remain low for years to come due to the effects of structural forces such as sluggish productivity and population growth.
In his final speech of the year, Poloz stepped back from near-term issues to focus on long-term forces acting on the economy, and laid out some specific areas the Bank of Canada expects to work on in 2020.
“On balance, it looks like the global economy is set for continued slow economic growth for mostly structural reasons” over a period of years, said Poloz, according to prepared remarks of speech in Toronto. He noted he’s not making any “near-term prediction” on Canadian policy, other than to say the economy is running close to capacity.
“I am talking about structural forces acting on the global economy,” he said. “In this era, it looks like interest rates are likely to fluctuate around historically low levels.”
Poloz said structural factors have been responsible for the disappointing economic growth that has occurred since the 2008 recession. At the same, despite the potential for technology to boost economic efficiency, near-term risks to productivity growth are tilted to downside because of trade tensions, Poloz said.
“This means that low interest rates are likely to persist,” he said.
One consequence of interest rates remaining low is that debt may continue to rise as a share of the economy, both at the household and government level. That makes economies more vulnerable to shocks.
Poloz also cautioned against being too complacent about inflation, at a time when some are proposing potentially inflationary solutions to fix structural problems. He invoked the examples of the “Great Inflation of the 1970s,” when high debt levels and excessive monetary expansion led to a surge in prices, and said those lessons seem to be fading “from our collective memory.”
“Perhaps the recent tendency for inflation to run below target in many countries has fostered a degree of complacency,” Poloz said. “The risk of a surprise outbreak in global inflation is low, but it seems to be that the combination of elevated household and government indebtedness and populist politics holds inflationary potential for some countries.”
He was particularly critical of Modern Monetary Theory -- the notion that governments should issue as much newly issued money as needed to keep economies growing.
“This sounds like Modern Monetary Theory is offering a free lunch, and most of us know there is no such thing,” Poloz said.
Canada is fortunate to have an inflation target that addresses such risks “directly,” Poloz said. He added a renewal of the mandate is one of the main things the central bank will work on next year, along with studying:
- How to embed financial stability linkages in the Bank of Canada’s monetary policy framework by refining core economic forecasting models. Financial stability issues could alter the horizon over which inflation is brought back to target
- How to better assess the impact of artificial intelligence and digitalization on financial stability and the economy. “In 2020, the bank will be working hard on new ways to detect and determine the economic impact of the fourth industrial revolution.”
- The potential impacts of digital money, including whether it should issue currency in digital form and how to think about emerging payment currencies
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