MNI INTERVIEW2 (RPT): Stimulus Saves Canada From Abyss-Poloz

(Repeats article first published on May 21)

Former Bank of Canada Governor Stephen Poloz, who oversaw most of the BOC's bond purchases early in the pandemic, rejected the idea unprecedented monetary support backfired amid calls from a top Conservative leadership candidate to fire current Governor Tiff Macklem.

Poloz sidestepped Pierre Poilievre's arguments that QE underwrote reckless deficits and triggered a burst of inflation, saying he didn't want to "throw some extra gasoline on that fire." In an interview Friday, Poloz instead pointed to the need for strong action against what many economists saw as the risk of a 1930s style Great Depression.

“A gigantic crater opened up in front of us. We could have as a society simply decided to walk down into that crater, walk along the bottom of it, and climb up the other side. That’s what a depression would feel like, and it would take several years perhaps for all the imbalances to get worked out,” said Poloz, whose seven-year term as governor ended in June 2020.

Most stimulus was delivered globally by governments as central banks ran out of room to cut interest rates, he said. “We were really mainly in charge of making sure markets continued to function, that they didn’t break down,” he said.

STARED INTO ABYSS

Canada avoided a technical recession and has bounced back strongly, and while inflation is elevated it could slow significantly next year, he said. "If we get to the end and of course we’re out of the crater, it’s time to mop up the extra liquidity and get things completely normalized, well that’s a pretty big success story,” Poloz said.

Macklem has halted new bond purchases and says 40% of the balance sheet assets should roll off the books over the next two years. He's also raised the policy rate 75bps this year and markets expect another 100bps by July, though one former adviser has told MNI the Bank has still fallen further behind this year's price jump.

CPI rose 6.8% in April, the fastest since the Bank adopted inflation targets in 1991, and is close to a peak set back in 1983. While Poilievre has said he would fire Macklem, that's a power reserved for Finance Minister Chrystia Freeland who earlier Friday supported the Bank. Her Liberal Party could remain in power into 2025.

Inflation could move to about 3% next year as long as there aren't new shocks like the Ukraine war or China's Covid lockdowns, Poloz said.

“It may not have been a perfect landing, but it’s a landing after we stared into the abyss, and policies worked as they should. People have to be reminded of that counter-factual often, because they forget it almost immediately,” he said. The depression scenario meant Canada might have faced 15% unemployment for several years, he said. Inflation expectations could become entrenched but central banks are showing resolve with rate hikes and unwinding QE, he said.

CANADA'S ENERGY OPPORTUNITY

Poloz, whose grandfather came to Canada from Ukraine between the first and second World Wars, said there's a chance now to help Europe replace Russian energy supplies.

“We have the ability to supply far more conventional energy to the world than we do, if of course we decide at the political level that we are ready to do it.” Poloz is also on the board of directors of Enbridge, one of Canada's major energy companies.

Like other former officials have told MNI, Poloz said Canada is losing out at the moment especially to U.S. suppliers because of delays approving energy pipelines. Prime Minister Justin Trudeau also wants future exports to align with a goal of zero net emissions by 2050.

Three billion people have no access to electricity and often use scrap wood or other material to cook, Poloz said, making it questionable to minimize the role fossil fuels must play as carbon capture and green energy are developed.

“Even if we do a perfect job of that, close to half of world energy needs will still be based on conventional fossil fuels," he said. “It’s a little bit arrogant for countries like ours to say this is the transition, this is the way it’s going to be, and I’m not sure what that means for those folks."