Photographer: Brent Lewin/Bloomberg

Inflation Goals Aren’t Enough to Avoid ‘Trouble,’ Poloz Says

Policy makers should move beyond short-term budget and inflation targets that leave their economies exposed to longer-term debt bubbles like the ones hindering growth since the 2008 financial crisis, Bank of Canada Governor Stephen Poloz said.

Central banks with inflation targets like Canada’s are finding that the benefits gained from short-term stability can create dangers in the background as government or consumer debt rises, Poloz said in a lecture Saturday at the University of Ottawa honoring his former professor Doug Purvis.

“While experience shows that inflation targets have improved macroeconomic performance, the experience of the global financial crisis and its aftermath demonstrates well that such targets are not sufficient for preventing trouble,” Poloz said.

Government leaders also need to coordinate more with central banks in the future to make sure that the collective mix of economic policies avoids a destabilizing build-up of consumer or government debt, Poloz said. That has to be done without compromising the independence of central banks that keep inflation in check, he added.

Poloz’s lecture revisited decades of Canada’s monetary and fiscal policy choices and reran models to show the implications for debt stock if, for example, governments chose to ramp up deficit spending. The results showed different forms of policy stimulus could drive up either private sector or government debt.

Canada’s top central banker didn’t comment on the outlook for the current 0.5 percent policy rate. He did say that the export recovery since the global crisis has been tepid.

‘Halting’ Export Recovery

“The legacy effects of the financial crisis have lingered in many countries, and Canada’s export recovery has been halting at best,” Poloz said. “Accordingly, monetary policy has remained very easy in order to keep inflation near its target.”

The Bank of Canada sets interest rates to keep inflation at a 2 percent target, under a five-year agreement with the government that’s up for renewal by the end of the year. Poloz said Saturday the renewal process has shifted from research on how the target has worked to active discussions with the Department of Finance.

While taking questions from the audience, Poloz also reiterated his view that interest-rate changes have a smaller impact on the economy at today’s low levels, and that fiscal policy can have more of a punch.

The Bank of Canada’s staff has just started updating an economic forecast ahead of the next rate decision on July 13, where there will be more details on the wildfires in Alberta that shut down 1 million barrels of oil production, he said at a later press conference.

Wildfire Impact

Policy makers at the May 25 meeting said the fires may reduce second-quarter growth by 1.25 percentage points from an earlier estimate for growth of 1 percent, which in effect means GDP would shrink by 0.25 percent.

The Governor gave more detail Saturday, saying a little more than half of the loss is from crude production and the rest is from the time it will take for people to resettle around Fort McMurray, where more than 80,000 were evacuated last month and are just starting to return,

“There is a certain amount of arithmetic around, and the rest though is much more highly judgmental; when do people actually get back to work, when do they begin rebuilding,” Poloz said at Saturday’s press conference.

On the U.S., which buys three-quarters of Canada’s exports, Poloz said Friday’s report of slow job growth in May wasn’t a conclusive sign of weakness after a long run of positive signs. The addition of 38,000 workers, the fewest since September 2010, followed April’s advance of 123,000 that was smaller than previously estimated, a Labor Department report showed.

“We have had a pretty straight line in the U.S. labor market for quite some time, so I suppose it has a higher surprise value, but it’s not unusual to have that kind of variability in the data,” Poloz said.

(Updates with additional Poloz comments throughout.)

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