Short List for Next Bank of Canada Governor Is Down to Two Names

(Bloomberg) -- Prime Minister Justin Trudeau’s search for a successor to Bank of Canada Governor Stephen Poloz is entering its final days with the government having already reduced the shortlist of candidates to two, according to people familiar with the matter.

As Poloz prepares to step down on June 2, the pressure is on Trudeau’s finance minister, Bill Morneau, to name a replacement to allow for a transitional period at a time when the central bank is on the frontlines of fighting the economic fallout of the coronavirus.

Poloz’s top deputy, Carolyn Wilkins, who has played a central role in the central bank’s response to the crisis, is one of the remaining contenders, according to the people, who spoke on condition they not be identified because the matter is confidential. While the second name has yet to emerge in public, BlackRock Inc.’s Jean Boivin is no longer in contention. Tiff Macklem, dean of the University of Toronto’s management school and a former central bank official, regularly features in speculation, though it’s unclear whether he has sought the position.

Whoever gets the nod will inherit a tough assignment, one that’s dramatically different even from when candidates were formally interviewed in February and early March. In an effort to stabilize an economy grappling with a pandemic and tumbling oil prices, Poloz has cut the benchmark interest rate to near zero, injected tens of billions in cash into the banking sector and started purchasing government debt.

On the one hand, the Bank of Canada’s role in the crisis is a secondary one, as monetary policy plays second fiddle to emergency government spending. On the other, the stakes have never been higher for the governor of a central bank that must fund an unprecedented level of government borrowing.

The situation is fraught with risk for the next governor, as the central bank’s deficit-financing role threatens to politicize the institution and erode its independence. The job will require some backbone.

“You need someone forceful,” Mark Chandler, head of fixed income research at Royal Bank of Canada, said in a telephone interview. “There does have to be some push back.”

The outright government bond purchases are without precedent in Canada, but far from unique in today’s world. All major central banks are doing it for the same reasons -- the government debt needed to tackle the crisis is too large to be absorbed by the private sector.

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The Bank of Canada’s government bond purchase program is still in its infancy. Much of the central bank’s activity so far has been in shorter-term money market operations aimed at providing the financial system with liquidity on a temporary basis.

Holdings of federal government debt rose by more C$30 billion ($21 billion) over the past three weeks, but that’s expected to expand rapidly, given a budget deficit set to easily surpass C$200 billion -- a gap that’s about 10% of economic output.

The central bank also plans to acquire provincial and corporate bonds, sending it deeper into politics and increasing its exposure to credit risk.

With the central bank still in the thick of its emergency response, Wilkins would offer the most continuity. Her leadership role in keeping financial markets functioning has given her an opportunity to build credibility with key players such as the heads of Canada’s commercial banks, a group that has plenty of sway over who becomes governor.

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Perhaps more importantly, the crisis has allowed Wilkins, 56, to work closely with Morneau, whose ability to get along with the next governor will be key to the job. The growing importance of fiscal policy means one of the Bank of Canada’s biggest challenges will be to find a way to deepen coordination with government without giving up control of monetary policy.

Poloz has expressed optimism these extraordinary measures will eventually be scaled back. “Someday the tensions will ease back and we won’t need as much liquidity in the markets in order to keep them functioning,” the outgoing governor said at a March 27 press conference.

But there are worries the Bank of Canada could face pressure to fund more and more spending, even after the emergency response. How easy will it be to turn off the taps just as the federal government becomes increasingly reliant on the lender of last resort to finance its debts. It’s one thing for the central bank to finance income support measures, another for it to fund agendas.

In the short term, it’s all academic. With the economy in crisis and inflation nowhere in sight, keeping the taps open is the only option.

©2020 Bloomberg L.P.