Canadian Press
Canadaโs response to the COVID-19 pandemic will โclearly lead to higher indebtednessโ once the economic shock has passed, Bank of Canada governor Stephen Poloz warned Monday.
Poloz pointed to a drop in interest rates that would normally boost near-term economic growth through greater borrowing โ but such borrowing will add to debt levels the central bank has previously warned about.
That can leadย to slower economic growth and make it more difficult for the central bank to hit its two-per-cent inflation target in the future.
And it can also increase the risk that a future negative shock will have a magnified effect on the economy, Poloz says.
He says the bank is developing new tools to evaluate this trade-off between faster growth today and slower growth down the road.
Poloz made the comments as part of a speech looking back on hisย time as Canadaโs top central banker, which officially comes to an end next week, and look aheadย at the economic climateย his successor, Tiff Macklem, will face.
โSome of the financial vulnerabilities already present in the economy will have grown worse, and other sources of vulnerability are likely to emerge,โ Poloz said inย the speech, the text of which was released by the bank Monday afternoon.
โWe are truly entering unknowable times.โ
It wasnโt long after Poloz first took over from Mark Carney, who had Macklem as his second-in-command, that the bankโs key interest rate in 2015ย dropped to 0.5 per centย in response to an oil price shock.
The rate started to rise again two years later, eventually hitting 1.75 per cent.
Then the pandemic struck Canada hard inย March, compounding declining oil prices.
Over the course of the month, the central bank cut its policy interest rate to 0.25 per cent โย the lowest Poloz says it can go โย and began an unprecedented purchasing spree to help ease constraints in financial markets and allow governments to fund massive support programs.
Polozย says the dominant concern at the bank was the risk that deflation could emerge without such aggressive actions, then combine withย existing debt to fuel an economic depression.
โThe downside risks were sufficiently dire that there were no relevant trade-offs for monetary policy-makers to consider,โ the text of his speech reads.
โPicture the pandemic creating a giant deflationary crater in the middle of the economy;ย it takes what looks like inflationary policies to offset it.โ
Things seem to be working well, he says.
Poloz saysย the central bank will have to provide โsignificant monetary stimulusโ as the economy begins to rebuild, although itโs unclear how much and for how long.
โThe actions taken to counter the effects of the pandemic will clearly lead to higher indebtedness, for governments in particular,โ he says.
โGetting the economy back onto its growth track โ which is what is required if we are to hit our inflation target โ is the surest means of servicing those debts over time.โ
This report by The Canadian Press was first published May 25, 2020.