Tiff Macklem’s appointment as the governor of the Bank of Canada closes the chapter on Stephen Poloz’s tenure. On June 2, Poloz will step down and pass the torch to Macklem, who served as senior deputy governor from 2010-2014.
Poloz’s time at the bank was met with periods of economic recovery and plans for growth as well as stark crises leading to policies that will forge the next few decades, according to economists.
Don Drummond, a prominent Canadian economist and professor at Queen’s University, described Poloz’s legacy with a key characteristic in mind: “I think there’s one big thing that defines his era, and that he has a fine tune approach to monetary policy.”
Fine tuning the policy, in Poloz’s case, was to create monetary policy based on economic data. “That itself is all you really need to know about him,” Drummond explained, “because if you believe monetary policy can be used to fine tune the lags, you don’t wait for the data because at that point you act, you’re way too late.” Drummond spoke fondly of Poloz’s term, commending him for transparent communication with other financial leaders and the press.
Stephen Poloz’s appointment to Governor
Poloz, previously the senior vice president of Export Development Canada, took the helm from Mark Carney at a time when the Canadian economy was recovering from the 2008/2009 global financial crisis. He was an unexpected choice, with the industry expecting then senior deputy governor Tiff Macklem as the heir apparent.
While the economy was finding its footing again with a one per cent inflation target since 2010, the bank was targeting a two per cent inflation. In his appointment speech in May 2013, Poloz hinted at a stronger push to expand recovery efforts: “We are in a recovery that is not as vigorous as would normally be expected,” he said. “I think it will be necessary to nourish it, I don’t know for how long.”
Interest rates had been at near-record lows of one per cent when he took office. The challenge of keeping rates low to stimulate economic growth or to raise rates and avoid household debt growth would be a consistent line to toe throughout his tenure.
The oil slump and household debt surge
The first great challenge to Poloz’s term was the 2014 Alberta oil crash, when a large volume of oil in storage caused a global price collapse. Western Canadian Select and West Texas Intermediate had commodity prices seeing ten-year lows in 2016. This triggered a regional recession in Canada’s oil patch, leading to collapsing property values in Fort McMurray. Interest rates were once again brought to the recession lows of under one per cent to 0.75 per cent. Oil, which accounts for just under ten per cent of the national GDP, was at the centre of policy deliberations.
These low interest rates, some critics have argued, fuelled a significant run-up in household debt with a household debt to personal disposable income ratio of 166.5 per cent by Q3 2019. Canada had the highest household debt load in the world. This prompted questions and remarks from the media, like the infamous “candyman” remark from business journalist Andrew Bell when he pressed Poloz on the bank’s role in contributing to high debt loads.
Mortgage debt took up almost three quarters of the total debt figures, according to the Bank of Canada.
Drummond defended Poloz’s approach to interest rates. “In fairness to Poloz, we didn’t have anything approaching a crash in the housing market. We had challenges, we had affordability challenges majorly, but we didn’t have a crash.”
The interest rate that the bank and economists grappled with was that lowering the rates ran the risk of fuelling debt even higher or bringing rates up and pushing many Canadians into insolvency.
The COVID crisis
The challenges in Poloz’s term leading up to 2020, though not insignificant, paled in comparison to the economic downturn that the novel coronavirus brought to the world. COVID-19 put the global economy at a standstill, forcing the Bank of Canada to lower the benchmark rate multiple times and take on quantitative easing measures that have never been attempted before.
Drummond said that the QE will be a strong challenge not just for the next governor, but for the next few generations.
“I think the next candidate is going to live every day with this for the next seven years… We’re so far out of fiscal and monetary equilibrium that it’s just going to take forever,” he said.
Economists like Drummond believe Poloz did the best job he could with the unique circumstances his term brought. Whether or not all of the fiscal tools at the bank’s disposal have been effectively used over the decade will be the subject of debate for decades.
One thing is for certain: the monetary policies made under Poloz’s term will have far-reaching impacts years from now.
“That’s the thing in ten years or twenty years that textbooks and textbooks and academic articles will be written on the whole debate about monetary policy,” Drummond said. “Because we have always thought of monetary policy as designed to get in and get out quickly.”