OTTAWA – Bank of Canada governor Stephen Poloz has waded into the debate over the merits of quantitative easing, suggesting he disagrees with the finance minister over whether it has helped the U.S. economy.
Jim Flaherty raised eyebrows earlier this month when he told reporters he never supported quantitative easing by the U.S. Federal Reserve, although he had appeared to back the decision in 2010. Flaherty had also signed off on a similar policy for Canada — although it was never deployed — in 2009 during the height of the financial crisis.
Under persistent questioning on the issue from the Commons finance committee Tuesday, Poloz said he would not characterize the policy as simply printing money, as the minister had.
“What the literature is showing us is that the U.S. program has influenced the economy and made it a little stronger… so that’s a good thing,” he said. “Later on, of course, it has to get wound down.”
The Fed’s aggressive $85 billion a month bond-buying program, dubbed quantitative easing, has helped push down interest rates to spur lending and jump start economic growth. In turn, that has boosted stock markets and weakened the U.S. dollar.
The apparent disagreement is likely academic under current conditions — given that no one is expecting a second financial meltdown in the near future — but Poloz admitted if such a crisis were to occur, the decision on quantitative easing would be a “team” effort between the bank and the finance minister.
Poloz’s testimony was the clearest he’s been on the issue to date and suggests he would be prepared to adopt the policy if conditions warranted.
But NDP MP Guy Caron, who led the questioning of the governor, said he was left confused as to whether Poloz would be able to act on his own against the finance minister’s wishes.
“The independence of the Bank of Canada is an important principle and I’m not sure we have an answer to that at this time,” said Caron.
The governor was called to brief MPs on last week’s gloomier forecast by the Bank of Canada, which projected growth slower than previously anticipated in the current and upcoming two years. The bank’s new estimates are that the economy will expand by 1.6 per cent in 2013, 2.3 per cent in 2014, and 2.6 per cent in 2015.
The bank’s other major change last week was in dropping it’s so-called forward guidance after 18 months of warnings about coming interest rate increases, a move that had the effect of sending the Canadian dollar tumbling by almost two cents over the next few days.
Poloz called the decision to drop the “tightening bias” logical in the face of persistent below-target inflation numbers, and greater than thought slack in the economy. The move led analysts to pencil in no rate hikes until sometime in 2015.
While some analysts said the decision was overdue, the side benefit of a lower dollar may have been precisely what the bank governor ordered.
Poloz has staked his projection of a return to robust growth on the expectation that once the U.S. and global economies pick up, they will demand more goods from Canada and help business confidence and investments.
The transition to export-based growth has been slower than the central bank had thought, however, particularly in non-resource exports such as manufactured goods.
Senior deputy governor Tiff Macklem told the MPs that part of the reason for such a poor performance is competitive pressures, of which two-thirds can be traced to the strong loonie pricing Canadian products out of foreign markets. Another reason, he said, is that there are just fewer Canadian exporting firms standing after the 2008-09 recession.
The good news, said Poloz, is that the situation is starting to reverse itself, which should be good for both exporters and employment.