Former Bank of Canada Governor Stephen Poloz has spoken out about the limitations of monetary policy in addressing the economic challenges created by COVID-19. In an interview at Bloomberg’s virtual Canadian Fixed Income Conference, Poloz emphasized that fiscal policy should be the primary tool for lifting the economy out of its current hole.
Monetary Policy Near Its Limits
According to Poloz, the central bank has done most of what it can do in terms of monetary policy. As the economy returns to normal, cash will flow back into the system and the Bank of Canada’s balance sheet will shrink automatically. However, there is a more pressing concern: how sustainable is the debt being drawn down by governments?
Government Debt on the Rise
Poloz cited a report by the International Monetary Fund (IMF) that estimated Canada’s general government gross debt will rise to 115% of gross domestic product this year, from 89% in 2019. This increase in debt has raised questions about its sustainability.
Debt Service Issue
While policy makers may not have much experience with such large numbers, Poloz believes that if interest rates stay low, it will be more of a "debt service issue." In other words, the primary concern is not the accumulation of debt itself but rather the ability to service it.
Sustainability Criterion
Poloz expressed optimism that the sustainability criterion can be met, provided government money is used for productive reasons and purposes. This would enhance the economy’s ability to grow in the long term. However, he noted that interest rates are likely to stay low for a generation, which could make it more challenging for governments to manage their debt.
Fiscal Policy as a Solution
Good fiscal policy can help avoid the need for negative interest rates, according to Poloz. He emphasized that this is "a good thing for everybody." In fact, he suggested that social infrastructure such as daycare could be put in place by the government to help the economy grow in the longer term.
Negative Interest Rates
Poloz noted that negative interest rates have only been used in economies where fiscal policy was failing to provide a solution. This is particularly true for Europe. While they remain an option, he believes that monetary policy has already done most of what it can do.
Conclusion
In conclusion, Poloz’s comments suggest that the Bank of Canada is close to its policy limits. Fiscal policy should be the primary tool for lifting the economy out of its current hole. However, this requires careful management and a focus on productive uses of government money. The sustainability of debt remains a pressing concern, but with good fiscal policy, it can be met.
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- Bloomberg.com
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