The next governor of the Bank of Canada didn’t say a lot, but he said enough to deduce that his tenure promises a change in focus when he takes over from Mark Carney next month.
At the press conference Finance Minister Jim Flaherty called to introduce his choice for governor, Stephen Poloz, the chief executive officer of Export Development Canada, twice made reference to his recent experience in the trenches with the country’s business managers.
“In 2012, I think I visited 70 or 75 CEOs across Canada in my capacity at EDC,” Mr. Poloz said. “It gives us a true anecdotal feel for what is going on in the economy, which I consider to be of exceptional value.”
Later, he described his interactions with Canadian companies as a “great source of intelligence and of understanding what is actually going on.”
It would be unfair to say that Mr. Carney and the Bank of Canada’s current crop of leaders are out of touch with the concerns of the average Canadian business executive. The central bank has five regional offices that constantly are gathering anecdotal evidence and policy makers incorporate the results of a quarterly survey of executives into their interest-rate decisions.
Yet the Bank of Canada, both recently and traditionally, has not felt the need to play up its interactions with individual businesses. The central bank’s approach to the economy is more academic, befitting an institution populated by PhDs. Mr. Poloz, it would seem, is inclined to change the Bank of Canada’s image as an ivory tower.
“Stephen is an appointment for the real economy,” said John Curtis, an adjunct professor at Queen’s University in Kingston, and a former chief economist at the Trade Department.
“The bank is the best economics department in the country, but it’s quite refined and constrained by its circle,” he added. “Out of that background comes a lack of knowledge about the real economy. They are not in the trenches.”
What that means in real terms is open for debate.
“The drawback, some will argue, is that maybe all this experience might suggest he is more inclined to be captured by the corporate sector,” said Pierre Siklos, a senior fellow at the Centre for International Governance Innovation in Waterloo, Ont. “How he navigates between understanding the needs of the corporate sector and the job of monetary policy is not going to be easy.”
Mr. Poloz’s sympathy for Canadian executives could show itself in his approach to the exchange rate. The Bank of Canada has a long tradition of allowing the value of the Canadian dollar to be set by the market under the theory that a floating exchange rate works as a shock absorber: For example, when the economy slows, the dollar will weaken, helping exporters.
That’s been less obvious in recent years as the dollar has remained elevated despite steadily weaker economic growth. Amid the lament of some exporters, Mr. Carney has done little to slow the currency’s ascent. David Laidler, professor emeritus of economics at the University of Western Ontario, said he thinks Canada’s next central bank governor could take a different approach.
“I think he’ll pay more attention to the exchange rate,” said Prof. Laidler, who knows Mr. Poloz, a Western graduate. “The next time the exchange rate goes to $1.05 (U.S.), you might find some more direct statements about that than you have seen under previous regimes.”
Friends and associates say it’s unlikely Mr. Poloz will seek to change Bank of Canada policy in any fundamental way.
To be sure, Mr. Poloz at Thursday’s press conference identified the Bank of Canada’s inflation target as “sacrosanct.” When the Bank of Canada adopted the target in 1991, Mr. Poloz was one of the central bank’s top researchers, and much of his effort would have been devoted to making sure that what still was a theory worked in practice. There is little reason to think Mr. Poloz has gone soft on inflation since.
Under a formal agreement with the government, the central bank’s mandate is to keep inflation advancing at about 2 per cent a year. And even though the Bank of Canada Act invests the governor with the sole responsibility for setting monetary policy, in practice those decisions are made by the governing council, of which the governor is one of six members.
“They treated all members of the governing council as equals in the decision-making process,” said David Longworth, a former deputy governor who served on policy committees led by David Dodge and Mr. Carney.
Mr. Poloz and Mr. Longworth wrote the draft of the first ever Monetary Policy Report, which now is the cornerstone of the Bank of Canada’s communication policy, and Mr. Poloz is considered a strong communicator with a gift for making arcane economic subjects understandable.
Yet it remains unclear whether he will make the Bank of Canada a more transparent institution.
Mr. Poloz’s first significant challenge could be establishing his credibility in global financial markets. While he’s well known and respected at home, many international investors see a governor who was chosen over a more obvious successor to Mr. Carney – Tiff Macklem, the Bank of Canada’s senior deputy governor.
“There’s a lot of head scratching going on over why it turned out this way,” Thorsten Koeppl, an associate professor of economics at Queen’s and a former economist at the European Central Bank, said in a telephone interview from Rome. “You don’t want to have a perception in the market that now it is trade and exchange rates that are becoming more important than independent policy.”
The government expects Mr. Poloz to take a lower profile than Mr. Carney, who graced Time Magazine’s “most influential list” and was interviewed by publications as far removed from monetary policy as Reader’s Digest.
They can’t dictate how Mr. Poloz conducts his business, but the Conservatives expect him to pull back from the media spotlight, limiting his public appearances to events such as monetary policy updates, major speeches and testimony to parliamentary committees.
“I think we’re going to go back to the traditional-type governor of the Bank of Canada who comes out once a month and does a press conference and does very little beyond that from a PR perspective,” said one source.
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