The BoC governor spoke Thursday and said that despite the risks, this is not the same as the Great Depression
The outgoing governor of the Bank of Canada said Thursday that life has been “a blur” since early March when the risk from the coronavirus pandemic was starting to become very real.
Speaking at an event in Ontario, Stephen Poloz recalled the relentless stream of meetings, videoconferences, and phone calls with bank leaders and peers from around the world.
He said that, despite the challenges and risks that the COVID-19 crisis presents, Canada entered this unprecedented period with a healthy economy, inflation on target, and the lowest unemployment rate in 40 years.
He likened the economy to a fit, healthy person, who is able to shake off the disease.
The governor, whose replacement will be appointed Friday (May 1), said that it is important to acknowledge the double-hit that Canada suffers whenever there are global shocks; once by the shock itself and then by the decline in commodity prices.
Even in January and February, oil prices had dropped from $60 to $45 a barrel he said, noting that the global shock would have affected Canada even if there were no cases of the coronavirus domestically.
Not the Great Depression
Poloz said that the action that has been taken since the start of the pandemic means that the risk to the economy is not the same as in the Great Depression when “policy-makers basically failed to respond and even worsened the situation by enacting protectionist international trade policies.”
Response to the pandemic has included measures to mitigate risk and he said the current situation is more in line with a natural disaster where policy is designed to pause and later restart the economy. He said that recovery from natural disaster event are typically “quite rapid and robust”.
The governor wanted to allay fears that the stimulus measures – the BoC’s expanded asset buying in particular - could lead to an inflation spike.
He said that unlike when central banks “print money” the current situation means that people are choosing to hold cash by drawing on lines of credit or selling financial assets. This requires the bank to shore up liquidity to avoid a credit crunch.
But once the economy restarts, he expects people to purchase financial assets and pay down lines of credit, meaning the central bank’s balance sheet can return to normal.
If it was “printing money” the bank would have permanently expanded its balance sheet and the new money would be forced into the system.
What’s ahead?
Governor Poloz reinforced that the current situation is uncertain and it is therefore challenging to make forecasts.
But he expects that the BoC will continue to be central to Canada’s response to the pandemic crisis.
He repeated that the bank’s inflation target remains the anchor to its activities and that stabilizing the economy is the focus to avoid inflation falling significantly below target for an extended period.
He added that the usual focus on financial vulnerabilities has not gone away and will be a larger part of risk management once the primary objective has been met.
