End of an era as Poloz exits Bank of Canada

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Stephen Poloz had only been Governor of the Bank of Canada for a few months in the late summer of 2013, when he gave a speech that defined his unique communication style and signalled a new era for a traditionally staid institution.

It was the Spaghetti Sauce Speech.

“When the bubble burst in 2008, we were left with a crater, which is where we now find ourselves. If you look carefully at a pot of simmering spaghetti sauce, under every bubble there is a crater that’s equal in size. So, a seven-year bubble, a seven-year crater,” he told an audience of Vancouver business leaders, who hadn’t anticipated that the head of a central bank would use Italian food to explain the recovery from the financial crisis.

“That was the moment you realized this was going to be a different central bank governor,” said Beata Caranci, chief economist at Toronto Dominion Bank.

It is the most Polozian stamp that Mr. Poloz has put on the job during his seven-year term that ends Tuesday: the colourful metaphor. There have been craters and storms, dog leashes and cracked trees, sailors and firefighters, roads home and detours.

The Governor’s penchant to employ unusual analogies to explain complex policy and economic concepts has irked central-banking traditionalists and occasionally made him the butt of jokes in the financial community, which struggled, especially early in Mr. Poloz’s tenure, to grasp a communications style that was too quirky and informal for some tastes.

But Mr. Poloz’s knack for pushing the bank’s often arcane message beyond Bay Street and the intellectual ivory towers, and delivering it to a wider audience, is something that the country’s business and economic communities have grown to appreciate.

“He has a unique skill set,” said federal Finance Minister Bill Morneau, who has worked closely with Mr. Poloz, particularly throughout the COVID-19 crisis, and calls him “a friend and a very effective colleague.”

“He is able to take complicated macroeconomic policy considerations, and help people to understand how it impacts Main Street and regular people,” he said.

Despite being a whip-smart economics PhD with a deep understanding of the inner workings of monetary policy and the financial system, Mr. Poloz has always seemed like a regular guy in an irregular job. He peppers public addresses with lame jokes. He’s more apt to pronounce it “gonna” than “going to.” He’s more “Steve” than “Mr. Governor.”

Had his term ended three months ago, this would have been how history would remember Stephen Poloz: the governor who kept a steady hand on the rudder while putting a more open, approachable face on the central bank.

But the arrival of COVID-19 has rewritten the final chapter of Mr. Poloz’s governorship. A big part of his legacy now will be the startling array of central-bank weapons that he has put to the test during the crisis, as the bank raced to shore up financial markets, keep liquidity flowing and give the economy its best shot at recovery. He slashed the bank’s key interest rate to a record low of 0.25 per cent and launched previously untested programs to buy billions in federal, provincial and corporate bonds. He leaves the bank in uncharted territory.

“Really, it might be fairer to break Poloz’s seven-year mandate into two distinct but uneven time periods: the first 95 per cent of his governorship, and the final 5 per cent,” National Bank of Canada economic strategists Warren Lovely and Taylor Schleich wrote in a research report last week.

Nevertheless, Mr. Poloz’s unique style has played a key role in his final few months, as he’s sought to put in place policies to help keep Canadians and their businesses afloat – and to explain those policies to a public that has been bombarded with bewildering economic news. Last week, in his final speech as governor, he was talking about a “deflationary crater” that the bank “must fill with water – liquidity – so that we can row our boat across it.”

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“Stephen followed the old adage to understand before being understood. That meant spending lots of time listening to Canadians, paying close and careful attention to the challenges and opportunities they faced,” Royal Bank of Canada president and CEO Dave McKay said in an e-mail. “His ability to translate real-world economics into monetary policy was one of the governor’s gifts and, in turn, one our country’s advantages.”

That approach was on full display in early 2015 – a coming-of-age moment for Mr. Poloz as governor, and his biggest test prior to the COVID-19 crisis. While economic indicators were not yet showing serious damage from the collapse of oil prices in the second half of 2014, Mr. Poloz listened intently to oil-company leaders who provided a harsh assessment of the pain the industry was experiencing on the ground, and the deep impact that the price crash was having on their spending plans. That persuaded the governor to cut interest rates that January – catching financial markets by surprise.

Though he was criticized for the bank’s lack of advance signalling that a rate cut was imminent, time has largely vindicated his quick action. Most economists agree that it helped avert a deeper and longer-lasting national downturn.

“People tend to think that the central bank shouldn’t surprise you unless it has a very, very good reason,” said Bill Robson, president and CEO of the C.D. Howe Institute and chairman of the think tank’s monetary policy council. “But for the Bank of Canada to have that freedom, and not always feel like it has to validate whatever expectation is out there in the market, is a positive thing.”

With the exception of the oil shock, most of Mr. Poloz’s term was marked by a steady march of the economy back to full capacity and the central bank’s 2-per-cent inflation target. This is what Mr. Poloz referred to in that same Spaghetti Sauce speech as bringing the economy “home” – a journey that was a recurring theme throughout his term.

By that key measure, Mr. Poloz’s tenure was a success: Prior to the COVID-19 crisis, the Canadian economy was operating close to full capacity, and inflation had been very near the 2-per-cent target for a year. Mr. Lovely and Mr. Schleich noted that inflation has been within the central bank’s target band of 1 to 3 per cent – the mandated objective guiding interest-rate policy – for 92 per cent of Mr. Poloz’s tenure, considerably more than the previous three governors.

“That’s not a small thing,” Mr. Robson said. “It’s actually a very important element that the central bank has maintained.”

Perhaps the biggest criticism of Mr. Poloz’s tenure is that a serious problem he inherited when he came to office in 2013 – high household debt – remains a major risk hanging over the economy today. He resisted calls from some quarters to push interest rates higher to quell borrowing, arguing that rates were the wrong tool for the job. Some critics point to still-high household debt as a failure of Mr. Poloz’s governorship; David Dodge, who was Bank of Canada governor from 2001 to 2008, disagrees.

“That’s the kind of judgment that he and the bank have had to make,” Mr. Dodge said. “I think the world would say that, by and large, that judgment was the correct balancing of things.”

In the power corridors of Ottawa, Mr. Poloz has consistently defended the independence of the Bank of Canada – in large part by remaining studiously apolitical himself. That allowed him to work relatively peacefully with both the Conservative government of Stephen Harper and, for the past nearly five years, with Justin Trudeau’s Liberals.

“I liked [Mr. Poloz], we got along very well,” recalled Joe Oliver, Mr. Harper’s finance minister in 2014-2015.

“I had no intention of getting involved in monetary policy, and he wasn’t getting involved in fiscal policy. We were doing what each of us was supposed to do, according to our mandates and responsibilities. That makes for a comfortable and productive working relationship.”

The COVID-19 crisis has blurred those lines of independence, as the central bank and the finance department have co-ordinated closely in delivering emergency supports to the economy and financial markets. In the early days of the crisis, Mr. Morneau and Mr. Poloz were on the phone with each other daily – often more.

The two of them were sitting side by side at the G20 conference in Riyadh in late February, when Italy’s finance minister gave the room the grim news that his country had a COVID-19 outbreak – a moment of realization among global leaders that a pandemic was afoot.

“I remember Steve and I looking at each other, and in that moment knowing that this was different,” Mr. Morneau recalls.

The pandemic has meant that Mr. Poloz departs with the biggest task of his career left unfinished. He leaves behind for his successor – Tiff Macklem, a former senior deputy governor who spent the past six years as dean of the University of Toronto’s business school – a long list of extraordinary financial-market measures that the bank will one day have to unwind.

He leaves an interest rate reduced to its bare minimum. He leaves a Bank of Canada balance sheet that has ballooned to more than $460-billion as a result of the bank’s COVID-19 measures, about four times where it stood before the crisis hit.

“I do regret leaving with the situation as it is today,” Mr. Poloz told a Senate finance-committee hearing in late May. “But that’s a statutory thing – my seven years are up.”

Mr. Poloz declined to be interviewed for this article. He hasn’t said what he plans to do next, although he has said that despite turning 65 this year, he doesn’t expect to retire.

“I do have a couple of things that look likely to happen, but I’m not really at liberty to discuss those,” he said recently.

He’s looking forward to working on his golf game – something that has suffered during the heavy workload of the governor’s job, which includes a busy travel schedule.

“I was away close to half the time … you miss 30 or 35 weekends a year because of the demands of the job,” he said in a video conference with reporters last month. “I won’t miss that.”

But whatever he does next, the metaphors will remain a key part of his repertoire.

“You’re always only one decent metaphor away from helping people understand everything, right?” he said, a mischievous twinkle in his eye.

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