Economists puzzling over the surprise selection of Stephen Poloz as the next head of the Bank of Canada see him helming a central bank with diminished influence, for now.
Many bank watchers expected the government to choose outgoing governor, Mark Carney’s successor from within the bank, but it went off the board somewhat with the choice of Poloz. The move has economists wondering what sort of signal this sends about the future of monetary policy in Canada.
Indeed, Moody’s Analytics says that “change at the top of the central bank gives the government a chance to send global financial markets a signal about its desired direction for monetary policy.” It was expecting an indication of “business as usual” that would have come had it chosen deputy governor, Tiff Macklem, for the post; or a more high-profile outside choice.
“With the choice of Poloz, the signal is less clear, other than suggesting the Harper government seeks to exercise more control over the bank’s leadership,” it says.
Just what that means for monetary policy is something markets will try to assess in the coming weeks, although Moody’s suggests that there is “clear historical evidence that countries with less independent central banks tend to experience higher average inflation rates.”
TD Economics says that there are no obvious policy implications from the choice of Poloz. It notes that, notwithstanding efforts to divine his market leanings, the central bank is not a one-person show — several senior officials influence the direction of interest rates. Moreover, the bank’s inflation-control mandate will serve as the basis for monetary policy decisions for at least three more years, it says; and, there’s nothing in recent economic data to alter its view.
“When governor-to-be Poloz joins in June, we expect the Bank of Canada to cling to its tightening bias and reinforce that the next move in rates is more likely to be up than down. The next interest rate hike is poised to therefore occur in the final quarter of 2014,” TD concludes.
Indeed, the current rate environment leaves little room to lower rates further. CIBC World Markets points out that central banks around the world are losing influence due to the fact that monetary policy in many countries has run out of room to provide further stimulus. It says Poloz “will soon realize that he has inherited a job with diminished power.”
“In many ways, monetary policy in Canada has never been so asymmetrical. While policy is currently hardly helpful, it will be extremely effective when interest rates start rising. In fact, the surprise will be how little an increase in rates it will take to achieve any desirable slowing in activity,” it says. “But between now and then, the new governor will have to command a ship with little firing power.”
“…accommodating a sharp rebalancing in the sources of growth in the Canadian economy away from households and toward exports and capital investment will distinguish the Poloz era,” suggests Scotia Economics. “Poloz is reportedly an inveterate optimist,
and that may ultimately lend a clue to the direction in which he will guide the central bank going forward.”