As Ben Bernanke’s hand hovers over America’s quantitative-easing spigot and Mark Carney tries to charm a morbid UK economy back to life, Stephan Poloz is left as the “Cheshire Cat” of bank governors, grinning at the ease of the Canadian situation—although more difficult days are ahead.
Carleton University economics professor Ian Lee says Poloz is fortunate because he’s inherited a robust portfolio, but other economists say snapping the Canadian economy back to health will be much more difficult.
“It is going to be somewhat easier for Governor Poloz to normalize monetary policy” relative to the U.S. and the UK, acknowledged Craig Alexander, chief economist at TD Bank Group. However, Poloz’s time as governor won’t be a cakewalk.
With his first interest rate announcement this week, Poloz’s run as central policy maker at the Bank of Canada is officially underway. Just as he did this week, he’ll now regularly share headline space with Bank of England Governor Mark Carney, and Federal Reserve Chairman Ben Bernanke, as all three grapple with the ongoing task of economic stimulus in the wake of the 2008-09 financial crisis.
Poloz’s decision to keep the overnight rate at 1 per cent didn’t come as a shock to economists. The Bank of Canada has warned that consumers should be prepared for an eventual rate increase, but that a move upwards shouldn’t be expected this year.
“It has the Stephen Poloz stamp, in terms of having changed the language slightly,” Dawn Desjardins, assistant chief economist with RBC, said of the announcement Wednesday.
“In essence, the bank’s saying what it has been saying—it needs to see the economy grow a little more quickly, [and] inflation move toward that 2 per cent target before we can look forward to interest rates going up.”
Inflation is the key issue facing Poloz’s predecessor Carney in his new role at the Bank of England, as he deals with tepid economic growth, high unemployment, and the quandary of when and how to nurse the UK economy off of easy money. This week’s data had the UK’s inflation rate in June at 2.9 per cent, an increase from where it sat in May, at 2.7 per cent, but lower than what was predicted.
“Governor Carney has a very full plate… with lots of problems every which way he turns,” added Lee.
Also this week, Carney made his own announcement regarding interest rates, keeping the UK at 0.5 per cent. The new governor has been showing “leadership,” says Lee, for his ability to get all nine members of the Monetary Policy Committee to come to a consensus on the interest rate and stimulus decisions (at least for now), something his predecessor Sir Mervyn King was unable to do with frequency.
As if the job didn’t come with enough headaches, the dauntless British press have added a few. Such is the microscope he is under that, as CTV reported, the Daily Mirror’s business editor Graham Hiscott discovered that Carney’s high school trivia team in 1982 gave the incorrect answer when asked for the name of Snoopy’s bird friend Woodstock. They consequently lost the competition.
“Mr. Carney will be sincerely hoping such mistakes are a thing of the past,” Hiscott wrote.
Federal Reserve chairman Bernanke, who could leave the position in a year’s time, is likely dealing with similar levels of stress, as his own recent media appearances have sparked aggressive market reactions. A hint last month that quantitative easing in the U.S. would eventually taper off sent the Dow Jones on a downward spiral, falling 1.4 per cent over the course of a day. Likewise, American markets are storming back this week as Bernanke clarified his earlier statements to say that there is no “preset course” for the Fed’s economic stimulus program. And while better economic data has buoyed the economic outlook, many agree a recovery is still in a fragile state.
“What [Bernanke] is doing is trying to walk right down the middle of the line very carefully,” said Lee.
“He’s got a very delicate balancing act.”
While Poloz, Carney, and Bernanke all face a unique set of problems, all three have been tasked with the challenge of guiding their respective banks through a still-shaky global economic environment.
“The similarity is, all of the central banks are providing enormous stimulus to their economies,” noted Alexander.
Interest rates in all three countries remain “extraordinarily low,” and the central banks in the U.S., UK and Canada are all attempting to convey the message that interest rates won’t be rising anytime soon, he added.
The difference, however, is “the amount of stimulus that’s been provided, which has basically reflected the relative economic performances of the various economies,” Alexander said.
As noted by Avery Shenfeld, chief economist at CIBC World Markets, “All three central banks have been influenced by the lack of sufficient growth” in their respective economies.
But, “the U.S. and the Bank of England have gone to more extremes because they have interest rates below the Bank of Canada’s, and they’ve also been buying bonds to lower longer term interest rates,” Shenfeld added.
Having pumped a far greater amount of money into the American and UK economies, the Bank of England and the Federal Reserve will face a daunting task in unwinding the effects of quantitative easing.
But as Shenfeld noted, “We’re relying on a better US economy to get the Canadian economy in a faster gear.”
While Poloz’s job may look easier in the short term, it will only stay that way if the U.S. can get its economic growth back on track. One can only hope that future market reactions to Bernanke’s comments and agenda are less erratic.