World according to Bank of Cda head Poloz: cloudy with chance of spaghetti sauce

OTTAWA – Not every central banker compares the economy to a simmering pot of spaghetti sauce. And when Stephen Poloz used the analogy at a luncheon in June, it left many puzzled.

Five months later, there’s a growing comfort with the new governor of the Bank of Canada — and with his colourful, occasionally weird use of metaphors, sometimes drawing on his favourite TV series, Star Trek.

Poloz, 58, brings a common touch to the most august financial institution of the country, speaking in language more easily understood by non-economists and more couched, less declaratory than that of his superstar predecessor, Mark Carney.

A language, many analysts say, appropriate to an age marked by uncertainty and risk.

It’s still early in Poloz’s seven-year mandate, but bank watchers have noticed the shift in tone.

Carney tried to shame business executives to take a leap of faith and spend their “dead money.” Poloz — who had dealt with CEOs one-on-one for 15 years as head of Export Development Canada — sympathizes with their reluctance.

That’s where the spaghetti sauce comes in.

Poloz explained in a September speech that when the sauce simmers it creates bubbles with craters of equal size. So if it took seven years to create the crater that led to the 2008-09 Great Recession, it’ll take another seven years to fill it. In other words, be patient.

Even rock star central bankers can’t overcome “animal spirits,” a Keynesian metaphor Poloz is also fond of using.

That more cautious approach shows up in subtle and not so subtle changes in the bank’s approach to communications.

The bank’s signature publication — the quarterly monetary policy report — has increasingly moved from a no-nonsense comparison of hard numbers and predictions to more of a narrative of economic trends. Last month, Poloz introduced “confidence bands” on growth projections to underline the cloudy nature of the economic crystal ball.

As the governor explained to a House of Commons committee last week: “With this (and other subtle changes) we are reminding ourselves that economic projections are subject to considerable uncertainty.”

There was nothing subtle about what Poloz did on Oct. 23, however. After 18 months of the bank telling markets and Canadians to prepare for interest-rate hikes, Poloz simply ditched one of his predecessor’s signature innovations — the so-called forward guidance.

“There is no doubt we are into a post-Carney world,” says Ian Lee, an economist with the Sprott School of Business at Carleton University.

“It’s not just to be different from the last guy. I think what he’s trying to do is put less information out there and give himself a lot more degrees of freedom.”

Poloz is a different animal from Carney. He dresses for a scheduled interview in jeans and an open-neck shirt, telling the journalist the penalty for wearing a tie on casual Friday is $1 to the United Way campaign.

As schmoozy as Carney could be, it’s difficult to picture him out of his tailored suits.

Back to business, Poloz says the forward guidance recently used to warn households against borrowing veered from its original intent.

“Bottom line, I thought the interpretation of that as forward guidance was a bit of a distraction,” he said. “I would rather have forward guidance used as a tool when you are trying to do something extra, beyond explaining your forecast.”

Elimination of the guidance was widely praised by economists as long overdue because they said markets largely discounted it.

That’s not quite true, however. Markets sold down the loonie by almost two cents compared with its American counterpart after the announcement, and it has yet to recover.

Poloz has not been letter perfect in his first five months in office. The bank famously misjudged the impact of the Alberta floods and Quebec construction strike, pencilling in wild swings in economic growth in both directions. It didn’t happen — there was no dip in the second quarter and no signs yet of a big rebound in the third.

That could be why Poloz has decided to fuzzify his forecasts up or down half a percentage point. During Carney’s tenure, the bank attracted considerable heat for big misses.

He’s also more inclined to admit to feet of clay, as he did recently in conceding that the bank’s models for predicting when the economy will turn the corner were wrong.

Jayson Myers of the Canadian Manufacturers and Exporters industry group, who got to know Poloz well from the EDC association, says the governor nevertheless has strong views, despite his acknowledgment of uncertainly, and is comfortable out of the limelight.

Poloz calls his approach “leading from behind,” and uses a Star Trek analogy to explain.

“(It’s) like Jean-Luc Picard in Star Trek asking for ‘options.’ ‘Behind leadership’ can be valuable because you can sit back and watch the fur fly (debate of ideas). The French have a fantastic word for it, tatonemment, groping. So you feel your way there. It’s a team … we do it all together, it’s not just me.”

The beneficiaries have been his deputies, who have gotten bigger media attention because they’ve been allowed to “make news” rather than merely mouth Bank of Canada mantra.

Last month, senior deputy governor Tiff Macklem, originally the odds-on favourite to be the new governor, was given free rein to scoop the bank’s forthcoming growth forecast, and to give a major and much admired analysis of the difficulty facing Canada’s export sector.

That’s unusual because one of the reasons Finance Minister Jim Flaherty was said to have chosen Poloz was his familiarity with the export sector.

Poloz, who has known Macklem for over 30 years and recruited him to the bank, admits the competition for the top job made for some awkwardness, but says that is behind them.

“We’ve stayed friends,” he said. “I’m not going to deny initially there was a sense of, ‘Oh, this has happened.’ We work well together and I know Tiff is someone I can rely on with 100 per cent confidence, and I still think of him as my friend.”

Poloz makes no secret he has landed his “dream job,” a position he aspired to during his student days at Queen’s University in Kingston, Ont., where he switched from medicine to economics because, he says, “it felt more real.”

The challenge will be different and less dramatic than was faced by Carney. He says he will need to feel “our way” back to a normal economy when the models don’t always work anymore or least not like they did before the world changed.

Typically, he uses a metaphor to illustrate the point that the more effortless the task appears, the better he will have done his job.

“It’s the proverbial duck on a smooth pond,” he says. “The feet are going like crazy underneath, but it looks like the duck is kind of cruising.”