Stephen Poloz sits in a boardroom at his alma mater, the University of Western Ontario, on a snowy afternoon in late February.
The Governor of the Bank of Canada has just given his first public speech since shocking the financial markets with a completely unexpected interest rate cut in January. His address has thrown another curve ball, by pouring cold water on the market’s widespread assumption that he’s about to cut rates again at the bank’s next policy decision, just eight days hence.
In an interview, Mr. Poloz is calmly explaining – again – why he’s not the reason the Canadian dollar is mired near six-year lows against its U.S. counterpart. But his frustration is seeping through.
“The exchange rate depends on everything. The idea of actually choosing to put it somewhere is beyond concept. It’s completely contrary to how we think about how the economy behaves, and how monetary policy is best framed.
“If people can’t buy that, and say, ‘Well, you’re just doing it to move the currency,’ I don’t know how else to explain it. It’s just economics.”
As the words echo the room, a staffer checks what the Canadian dollar actually did since his speech less than two hours earlier. It’s up nearly a cent.
Such is the increasingly difficult and unpredictable life of the country’s most powerful economic policy maker, a seemingly regular guy in a conspicuously irregular position.
The 59-year-old economist was an unexpected but largely applauded pick for the governorship less than two years ago, a former monetary policy whiz kid who had left the central bank in mid-career to gain valuable real-world experience.
That experience would serve the country well as the prodigal son returned to help guide it back to economic prosperity. He had finally landed the dream job he had coveted since his student days.
But the dream has darkened considerably in recent weeks.
Mr. Poloz is presiding over the Bank of Canada at an acutely tricky period of an economic recovery like no other. Seven years after the global financial crisis the Canadian economy has still not found its footing, and danger signs are flashing.
Most notably, Mr. Poloz is grappling with a severe oil shock that threatens to derail the bank’s best-laid plans for economic recovery. Sinking oil prices led Alberta’s big energy companies to slash spending by billions of dollars and cut jobs, moves that are weighing heavily on growth in Western Canada, for years the country’s leading region.
But Mr. Poloz’s dramatic, untelegraphed response to the threat – the bank’s first interest rate cut in nearly six years – caused confusion and even distrust in the financial markets. As much as the bank felt this harsh medicine was necessary, it may now face a serious and lingering side effect: A loss of credibility.
The sudden decision to ease lending rates in a country already awash in household debt has puzzled the public, which can’t reconcile it with the bank’s often-espoused concern about the dangers of overextended consumers. And try as he may, he can’t shake the persistent perception of some that he’s bent on driving the Canadian dollar lower to lend a hand to the export sector, which includes manufacturers, oil producers and others, at the expense of importers.
Some see other mixed messages. Mr. Poloz in the fall ended the bank’s practice of “forward guidance” – essentially signalling the bank’s thinking on the direction for future rate moves. But his February speech was seen by many as doing just that – strongly hinting the next rate decision would be to stay put, which it was.
“His job instantly became one of the most unenviable jobs in the country,” says friend Peter Hall, chief economist at Export Development Canada, who worked closely with Mr. Poloz for nearly a decade at the export finance agency.
The right thing to do
The global economy is struggling through years of subpar growth, and central bankers around the world are under pressure to show leadership with sound policies. But it’s not clear that widespread moves to push interest rates ever lower, even around zero, are working much to stimulate economies.
The Bank of Canada’s string of more than four years of holding the overnight rate at 1 per cent was seen as a sign of stability. The quarter-percentage-point cut to 0.75 per cent in January upset that view.
“It seemed to come out of the clear blue sky. That was not helpful,” said Bank of Montreal chief economist Douglas Porter. “It gave the sense that there was something fundamentally wrong with the economy. It’s a blow to confidence.”
In a pair of exclusive interviews with The Globe and Mail – one a little more than a week before Wednesday’s interest rate decision, the other two days after – Mr. Poloz defended his rate cut as the right thing to do. He also disputed the notion that the bank has sacrificed some of its credibility – a currency he himself puts at a premium for effective transmission of monetary policy – by catching the markets by surprise.
“The action we took in January, in our judgment – and this is our job – was to react to a shock to maintain that confidence in our ability,” he said.
“I don’t regret a bit of it.”
He offers an analogy – a device for which he has become famous over his tenure.
“If you go to your doctor, and you say you’ve had this ache for three months, and it’s not right, and he says, ‘Oh, you’ll be fine’ – does that make you feel more confident? No.
“He checks it out and then he says, ‘You’ve got such and such and I suggest you do this.’ Then you’re reassured, because now you understand it and you have a response. You have confidence in your doctor when he’s done that.”
Perhaps this central-banker-as-doctor metaphor shouldn’t be a surprise from the 59-year-old Oshawa, Ont., native, who had originally planned to become a doctor, before an economics course he took on a whim in his first year at Queens University led to an ongoing 40-year love affair with the dismal science.
When you meet Stephen Poloz – “Steve” to his friends – he doesn’t come off as a typical central bank chief. While the string of Bank of Canada governors before him have ranged from reserved intellectuals (Gordon Thiessen) to distracted-professor types (David Dodge) to intimidatingly whip-smart bankers (Mark Carney), Mr. Poloz seems like a regular guy – a smart and thoughtful one, but a guy who could hold court at the local pub or over the back fence as easily as in the corridors of power.
He is a product of Canada. The past several Bank of Canada governors have been educated at the likes of Oxford, Princeton and the London School of Economics. Mr. Poloz is the first Bank of Canada governor in nearly a quarter-century to have received all of his education in Canada.
His suits are well made but not particularly crisp; the knot of his tie always looks like it’s ready to be loosened. He admits that he’d rather be wearing a golf shirt, and he teases staffers who don’t adhere to the Casual Fridays regimen he instituted when he took over from the impeccably buttoned-down Mr. Carney. When he gives a speech, he seems more like a kindly father giving the toast at a wedding than one of the most powerful men in Canada. He tends to blend into a cocktail reception, rather than dominate it.
At his late-February speech to a 500-strong crowd at the University of Western Ontario, it’s clear he’s comfortable in his surroundings and in front of the sizable crowd, which includes friends and academics from his days working on his masters and doctorate in the university’s storied economics department in the late 1970s and early 1980s. Indeed, he opens with a wry observation that the well-appointed auditorium, in the 21st century home of the Ivey School of Business, is located approximately where he used to park his 1970s-era Pontiac Parisienne when he was on campus.
After noting that the Bank of Canada is about to celebrate its 80th anniversary this month, he paused to poke fun at the significance of the event. “We’re going to have cupcakes, I’m told.” He pauses for a couple of beats. “That’s 1,300 cupcakes, so that’s not a small thing.” At a serious talk about the need to reinvent monetary policy for the 21st century, his aw-shucks deadpan and sense of timing have just garnered some laughs and taken the edge off the room.
Humour, Mr. Poloz’s friends and colleagues say, is his secret weapon. Leaning toward the self-deprecating vein, he uses it to win over others, to soft-pedal his point of view, to forge consensus. Throughout his career and in various managerial roles, he has started meetings with ice-breaking jokes or humorous anecdotes, setting a friendly, collegial tone more conducive to open and frank discussions among intellectual equals rather than a top-down imposition of his own views.
But beneath the everyman demeanour, there is evidence of a more intense, driven personality. As a kid, he was an honours student and his high-school valedictorian, a student who “was very upset if I didn’t get my A.”
Although he plays down the stories, people who knew him from his Western days say he more than once told them he intended to become governor of the Bank of Canada one day. He got his first job at the bank, a summer position in 1978, after one of his Queens professors told one of the bank’s deputy governors that he had a protégé whose research had concluded that the bank’s own work on the demand for money was “a load of rubbish.” And in his early days at the central bank after landing a permanent job following his schooling, he was well known throughout the building as a rising star with an eye on a future senior position. Indeed, when he left the bank in 1995, it was with the belief that he needed to build up experience in the real world if he wanted to accelerate his ambition to move into the bank’s upper echelons.
Mr. Poloz’s passion, away from the office, is golf. He enjoys reading (lately, science fiction and the post-Harry Potter work of J.K. Rowling) and playing the piano, but he says golf is his favoured activity when he can find the time. And his golf game says a lot about the man with the final word on interest rate decisions. He’s analytical, strategic, but once he makes a decision, he goes for the green – no hesitation, no regrets.
Searching for a final consensus
It’s Wednesday, Jan. 14, a week before the surprise rate cut. As he always does in advance of a rate decision (there are eight of them each year, with six to seven weeks in between), Mr. Poloz convenes the Governing Council – the powerful policy-setting committee made up of himself and his five deputies – to hear final recommendations from the bank’s senior staff.
In the room are Mr. Poloz, senior deputy governor Carolyn Wilkins, and deputy governors Agathe Côté, Timothy Lane, Lynn Patterson and Lawrence Schembri, along with up to a dozen senior advisers and staff members, including the heads of the bank’s four economics departments: Canadian, international, financial stability and financial markets.
The staff bring Mr. Poloz and his deputies up to speed on what the latest data, economic models and anecdotal evidence are telling them about where the economy is headed. Among other things, they examine the quarterly Business Outlook Survey, key inflation measures, economic risks and credit conditions.
The discussions that day almost certainly centred on how the dramatic oil price collapse was buffeting the economy – a topic that would dominate the rate cut statement and the bank’s quarterly Monetary Policy Report, both released on Jan. 21.
The meeting wraps up around midday, with each staff member, in turn, giving his or her recommendation on what Mr. Poloz should do with the bank’s key interest rate. The governor and deputies ask questions and test the assumptions made by senior staff, but they never tip their hand. That’s essential to preventing a leak of the rate decision and to leave all options on the table in case new and critical information comes in over the next few days.
The senior officials express a range of recommendations, but as they leave the room, there’s no sense that the balance of opinion is tilted toward a rate cut. Indeed, as the Governing Council begin their private deliberations over a light lunch, there’s no immediate sense that they favour cutting rates.
Officially, by law, the final decision belongs to Mr. Poloz. But by convention, it’s a decidedly more democratic process. Unlike the U.S. Federal Reserve’s policy-setting Federal Open Market Committee, which takes a recorded vote, Mr. Poloz and his deputies openly share sometimes divergent views, but work toward a final consensus.
His meetings with his Governing Council are more loosely structured and relaxed than those of his predecessor, the focused and demanding Mark Carney. But gradually over his tenure, sources say, his command of those meetings has grown, as long-serving deputy governors John Murray and Tiff Macklem have left in the past year, replaced by Poloz appointees Ms. Wilkins and Ms. Patterson. While he encourages a frank back-and-forth among the group, seeks consensus and spends plenty of time listening, Mr. Poloz still typically gets the last word.
But there’s no consensus coalescing in that first private meeting; they continue to hash it out on Friday, and again on Monday. It’s only by Monday that the council comes around to agreeing that, given the deepening gravity of the oil shock, a rate cut is warranted.
We’ll never know exactly how Mr. Poloz and his colleagues reached their controversial decision; the details of their policy deliberations are akin to state secrets. Unlike the U.S. Federal Reserve and the Bank of England, which publish minutes of their policy committee meetings, the Bank of Canada not only doesn’t publish them, it doesn’t even record them.
However, we do know what they would have been looking at. Anecdotal evidence from businesses – something that Mr. Poloz has made a higher priority since taking over the bank’s reins, putting an added emphasis on surveys, meeting with business associations and regular roundtables with CEOs – was telling the bank that senior energy executives were preparing for deep spending cuts that would put a serious dent in the country’s business investment and hiring prospects. And the bank’s own economic models, long the bedrock of their decision-making process, showed that, without stimulation from easier monetary policy, an oil price of $60 (U.S.) a barrel was going to severely slow the Canadian economy in the short term and delay its full recovery by at least a year, to 2017.
Even though the council fully expected the move to shock the financial markets, it ultimately decided it couldn’t accept that severe a setback to Canada’s economic recovery.
But what Mr. Poloz admits now is that the bank underestimated how dramatically the markets would respond to the surprise – swinging almost instantly from an expectation of no cuts to pricing in a near-certainty that further cuts were sure to follow. That required some significant massaging of the message by Mr. Poloz – first in his speech in London, Ont., on Feb. 24, in which he played down the need for an additional cut, and then in this week’s rate decision announcement, which hammered home that point.
“As I said in January, we have more room to manoeuvre if our assumptions turned out to be wrong. What was a surprise is how that became a consensus view that that meant we would continue to cut rates further.”
‘Dissection of words’
As for any credibility issue, Mr. Poloz says results are what matter.
“Our credibility hinges on the outcome – which is our commitment to the inflation target,” he says, noting that the core measure of inflation remains near the bank’s 2 per cent target.
“The credibility that actually matters to the functioning of the economy is very strong. People have confidence in that. Just go ask them.”
And the dream job?
He acknowledges that it has taken some time for him to get used to the idea that the markets and media put deep meaning into every word and turn of phrase out of his mouth.
“That degree of dissection of words, I probably wasn’t ready for,” he says. “All those nuances matter. It’s not a normal conversation. So we take more care about those things.”
And he still says he’s right where he wants to be.
“One of my basic values is helping people, making things better. That was the sense of wanting to be a doctor. Here, I get to do things for a lot more people,” he says. “That feeling of being in a position to make things better, to work together for a better Canada, is very strong here. I love that culture.
“As the governor, to be talking out in the world to real players and listening to what their perspective is, and being able to blend that into a dialogue that Canadians can appreciate? I don’t think it gets much better than this.”
With files from reporter Luke Kawa
STEPHEN POLOZ SAYINGS
On the relationship between the loonie and terms of trade:
“It’s like walking a dog on one of those leashes that stretch out and snap back. You might hope he’ll stick by your side, but, in reality, the dog is always off in all directions. By the end, your respective tracks zigzag all over the place, much like an economist’s chart. But when you leave the park, you’re still together. That’s how the relationship between the terms of trade and the dollar looks: It’s loose, but dependable.”
On how long the economic recovery will take:
“And if you look carefully – very carefully, mind you – at a pot of simmering spaghetti sauce, under every bubble, you’ll see that there is a crater. And quick prize for those who know how big is the crater? It’s exactly the same size, not almost the same size, it’s exactly the same size as the bubble. As you can see, it’s not a very sophisticated model. So as I see it, we had a seven-year bubble, so we’ll have about a seven-year crater.”
On Canadians’ high household debts:
“It's like if the tree in the backyard has a crack in it. You worry it’s vulnerable to a storm. But if no storm happens, it goes on and on, and maybe eventually strengthens through growth. If the right storm comes along and knocks it onto your neighbor's house, you've got a problem.”
On the difficulties of being a central banker after the Great Recession:
“It brings to mind the sailors of another era who were driven far off course by a nasty storm. When things calmed, they found themselves in the Southern Hemisphere. Suddenly, the navigational chart that they relied on – the night sky – was completely different. We have every reason to believe that, after the experience of the crisis is behind us, central banking will be defined very differently than it was just five years ago.”
On his efforts to get the economy on track:
“It’s the proverbial duck on a smooth pond. The feet are going like crazy underneath, but it looks like the duck is kind of cruising.”
On his ‘leading from behind’ approach:
“[It’s] like Jean-Luc Picard in Star Trek asking for ‘options.’ ‘Behind leadership’ can be valuable because you can sit back and watch the fur fly. The French have a fantastic word for it, tâtonnement, groping. So you feel your way there. It’s a team … we do it all together, it’s not just me.”
Editor’s note: A previous online version of this story said one of Stephen Poloz’s sayings, about a tree in the backyard, was about the real estate market. In fact, it was about Canadians’ high household debts.
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