“New Governor, same policy”, is how Lombard Street Research entitled its update on the prospects for Canadian monetary policy published soon after the release of the first Monetary Policy Report (MPR) under the tenure of Stephen Poloz, who succeeded Mark Carney as governor of the Bank of Canada on June 3.
If there was any doubt about the continuity of policy at Canada’s central bank, the new governor was quick to emphasise his commitment to its core mission, which is maintaining inflation within a narrow range of 1%-3%.
“The Bank of Canada’s role in the country’s economic reconstruction is, as always, to keep inflation low, stable and predictable,” said Poloz in his first speech as governor in June.
Inflation targeting became the cornerstone of the Bank’s monetary policy in 1991 — for good reason. Canada went into the 1980s with double-digit inflation, and although it halved from 10.9% in 1982 to 5.8% in 1983, over the rest of the decade it only dipped below 4% briefly, averaging 3.9% in 1988.
The policy announced in 1991 by the then governor, John Crow, set a clear target of reducing inflation, as measured by the total consumer price index, from about 5% in late 1990 to 2% by the end of 1995.
According to the central bank: “Inflation reached the target well ahead of schedule; and so the focus in the 1995 agreement shifted towards keeping it low, stable and predictable over the medium term, at an annual rate of 2% — the midpoint of a control range of 1%-3%.”
Inflation-targeting is a key part of the clear communications policy that the Bank has pursued for several decades, and which has been re-emphasised since the global financial downturn. “The crisis has reinforced the fundamental importance of effective communications,” said Carney in one of his last speeches as governor.
It was important for Poloz to pin his inflation-targeting colours to the mast early, because when his appointment was announced, conspiracy theories ran riot about it heralding the demise of the Bank of Canada’s independence.
His appointment was, after all, a surprise — so much so that at least one Toronto-based bank reportedly had to hastily re-write a press release welcoming the red hot favourite, Tiff Macklem, to the post.
A former deputy finance minister, Macklem had been senior deputy governor since 2010, and as a member of the bank’s governing council had been closely involved in shaping monetary policy.
The Bank describes itself as a “special type of Crown corporation”, adding that it “has considerable autonomy to carry out its responsibilities.”
It was that autonomy that came under question when Poloz was appointed. This was principally because his background as president and CEO of Export Development Canada (EDC) raised suspicions that the choice may have been at least partially politically motivated.
It was widely recognised that Poloz, who spent 14 years at the Bank from 1981-1995, was an outstanding candidate.
Nevertheless, mischievous press comment may explain why he has played down the issue of the currency since his appointment.
“People recognised that Governor Poloz would understand the plight of exporters well and wondered if that would influence his policy-making,” says Camilla Sutton, managing director and chief currency strategist at Scotiabank Global Banking and Markets in Toronto. “He has not done that at all. He has barely referenced the currency, mentioning it only twice in his first monetary policy report and one of those was to highlight how a strong Canadian dollar is good for business investment. Those who thought he’d be sympathetic to the plight of exporters facing a strong Canadian dollar have so far been disappointed.”
That may not remain the case indefinitely. “I don’t see any material change to monetary policy in the short term,” says Michael Gregory, senior economist at BMO. “But given his background he may be more attuned to what things are like on the ground for Canadian exporters. So we may get a bit more jaw-boning from Stephen Poloz about the strength of the Canadian dollar than we had from Mark Carney, who leant more towards benign neglect of the currency. I don’t see Poloz being interventionist, but he may be willing to talk about the currency as a matter of policy more than Carney did.”
See page 18 for an exclusive interview with Stephen Poloz.