Former Bank of Canada Governor Stephen Poloz said monetary policy is near its limits and fiscal policy should be the primary tool for lifting the economy out of the hole created by Covid-19.
The central bank has done most of what it can do, Poloz said during an interview at Bloomberg’s virtual Canadian Fixed Income Conference, adding that as the economy returns to normal, cash will flow back into the system and the Bank of Canada’s balance sheet will shrink automatically. The main question is how sustainable is the debt being drawn down by governments, he said.
The former governor, who stepped down from the Bank of Canada after his term ended in June and is currently a special adviser at law firm Osler, Hoskin and Harcourt LLP, cited areport on Tuesday by the International Monetary Fund that estimated Canada’s general government gross debt will rise to 115% of gross domestic product this year, from 89% in 2019. Policy makers don’t have much experience with such large numbers, but provided interest rates stay low, it’s more of a “debt service issue,” Poloz said.
“In the end, I think the sustainability criterion can be met, provided the government money’s being used for productive reasons, for productive purposes, and therefore enhances the ability of the economy to grow,” he said, adding that in real terms, interest rates are likely to stay low for a generation.
Good fiscal policy can help avoid the need for negative interest rates, which is “a good thing for everybody,” he said. Daycare is the kind of social infrastructure that, while expensive, could be put in place by the government to help the economy grow in the longer term, said Poloz.
Negative rates have only really been used in economies where fiscal policy was failing to provide a solution, in particular Europe, Poloz said, adding that while they remain in the central bank’s toolkit, monetary policy has already done most of what it can do.
“If there’s a little extra juice in that lemon, you want all the juice you can get,” he said. “If you’re the last person standing, you’ve got to be doing your utmost.”
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