BoC's Poloz Says Global Monetary Stimulus Is Reaching its Limit

  • Fiscal, structural changes may be needed to bolster growth
  • Bank of Canada Governor speaks to lawmakers in Ottawa

Bank of Canada Governor Stephen Poloz said he’s still wary about the risks to a global economy that is in need of a more balanced set of tools to cement growth.

With monetary policy at about the limits of its effectiveness, fiscal and structural reforms may now be needed to bolster the world’s recovery, Poloz said Tuesday to lawmakers at a parliamentary hearing in Ottawa. A renewed push to expand free-trade agreements may be one method of helping Canada rebound from the “massive” shock of low commodity prices, he said.

“The global economy retains the capacity to disappoint further,” Poloz said in his opening statement, adding Canada’s growth may be slowed for years by the “difficult adjustment” to cheaper oil and metals.

Over the past week, the Bank of Canada has highlighted concerns that the underlying economy is still suffering from the long-term effects of collapsing oil prices even as some data has been stronger than expected. At a rate decision last week, Poloz said he might have been inclined to cut the rate if the federal government hadn’t delivered a massive dose of fiscal stimulus in its March 22 budget.

Similar Tone

It was a similar tone today. Poloz reiterated negative developments in recent months, including slower global growth, falling investment in the energy sector and an increase in the Canadian dollar.

“We saw that these three developments would have meant a lower projected growth profile for the Canadian economy than we had in January,” Poloz said. Recent signs of strength “represents a catch-up after temporary weakness in some areas during the fourth quarter, and some of it reflects temporary factors that will unwind in the second quarter.”

Many of the questions at the House of Commons finance committee centered around how much Canada would benefit from deficit spending introduced last month by Justin Trudeau’s Liberal government, elected in October. Poloz said fiscal stimulus is more effective at boosting growth in a situation like today where interest rates are near zero.

“Monetary policy is clearly very stimulative globally, and is close to its maximum ability. Fiscal policy is less widely engaged,” Poloz said in response to a question in Ottawa Tuesday. “The third and probably the most important at this stage is structural changes to the economy, the barriers to growth.”

Policy makers need to do a better job of explaining how “structural” moves such as new free trade pacts, which can hurt some workers in the short run, are a benefit for the economy as a whole, Poloz said.

Poloz did sound some optimistic notes. Canada’s government is fortunate to have low debt levels and strong credit ratings as it expands borrowing, while non-resource exports are “clearly” gathering momentum.

Still, the verdict is still out.

“We have not yet seen concrete evidence of higher investment and strong firm creation,” in Canada, Poloz said. “These are some of the ingredients needed for a return to natural, self-sustaining growth,” he said.