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Bank of Canada Governor Stephen Poloz speaks at a news conference in Ottawa in March. 'It is clear that the impact of the pandemic will be a massive test for everyone’s policy-making ability,' Mr. Poloz said on Monday.

Sean Kilpatrick/The Canadian Press

Bank of Canada Governor Stephen Poloz says the Canadian economy is entering “unknowable times,” adding that the policy makers who will follow the soon-departing central bank boss will be working in “unparalleled uncertainty.”

“It is clear that the impact of the pandemic will be a massive test for everyone’s policy-making ability," Mr. Poloz said in the University of Alberta’s Eric J. Hanson Memorial Lecture, delivered on Monday via teleconference.

He said the most pressing danger is that the current dramatic economic downturn could fuel the kind of serious deflationary pressures that bring on a full-fledged depression – a strong argument for the bank’s rapid deployment of decidedly inflationary monetary policy.

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“Picture the pandemic creating a giant deflationary crater in the middle of the economy. It takes what looks like inflationary policies to offset that," he said.

“Basically, we must fill [the crater] with water – liquidity – so that we can row our boat across it,” he added in the question-and-answer session after his formal remarks.

That liquidity has included a long list of financial-market supports that the bank has introduced to keep credit flowing for the federal and provincial governments and the corporate sector, including large-scale purchases of bonds in the open market, in addition to cutting its key interest rate to a record low of 0.25 per cent.

“If we hadn’t been doing these aggressive things that we’ve been doing, as an economy, we’d be forced to walk down into the bottom of that crater, walk along the bottom, and then climb back out of it. That’s why depressions take so long to get out of,” he said.

“The downside risks [to inflation] are the most difficult to manage. The upside risks – if we misjudge something and the economy takes off really rapidly, and next thing we know, we’re concerned about inflation pressures – well, we know exactly how to deal with those things," he said. "That puts monetary policy firmly back in what I’d call ‘conventional space.’ We have all the tools and we know how to use them.

“The bigger concern is in the deflation space,” he said.

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The lecture comes just eight days before the end of Mr. Poloz’s seven-year term as governor. It has become something of a tradition for departing governors to deliver the Hanson lecture at the end of their tenure; Mr. Poloz’s address follows those of Mark Carney (2013) and David Dodge (2008).

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The theme of his lecture was risk management – something that has been a hallmark of his monetary policy since he took charge of the Bank of Canada in 2013. The address effectively bookends a speech Mr. Poloz gave about six months into his tenure, which signalled that this would be at the core of the bank’s policy approach under his leadership.

He said the current crisis has created a unique degree of unpredictable risks that economic models can’t quantify.

“It is safe to say that the policy makers who will guide us to whatever ‘normal’ turns out to be will be dealing with unparalleled uncertainty. We are truly entering unknowable times.”

He suggested that his successor, Tiff Macklem – who was named to the post earlier this month – will need to focus the bank’s economic research on helping to narrow that uncertainty gap.

“Looking ahead, our experience will be supplemented by research to improve our methods of dealing with uncertainty and managing risk. We can find better ways to model the impact of uncertainty on confidence and behaviour. We can broaden our analysis of the optimal policy mix to manage risks and uncertainty. And we can improve our measurement of the trade-offs between financial stability and inflation targeting.”

In the postlecture discussion, Mr. Poloz reiterated comments he made last week that he’s optimistic that the Canadian economy will bounce back quickly from the deep COVID-19 downturn.

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“I don’t think consumer behaviour is going to be dictated by the shape of that decline in activity and the recovery – because of all the very uncharacteristic fiscal support measures that were put in place in order to stabilize incomes,” he said. As a result, he said he sees "pent-up demand” fuelling the rebound as the economy reopens.

“Personally, myself, I think we’re going to be at the top end of the range of outcomes that people are talking about,” he said.

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