After seven years at the helm, Bank of Canada Governor Stephen Poloz would probably have preferred to go out with a whisper rather than a bang. Fate decided against that.
Under Mr. Poloz, who will step down in June unless the COVID-19 crisis leads Prime Minister Justin Trudeau’s government to ask him to stay on, the central bank has embarked on a course that is as controversial as it is unprecedented.
Monetary policy is arcane at the best of times – and these are decidedly not the best of times. But it is critically important that Canadians understand that what their central bank is doing right now amounts to a vast experiment in printing money that has never been attempted before in this country. Similar moves in the past, in other mid-sized countries dependent on trade and whose currencies are subject to the whims of international investors, have generally not ended well.
While Mr. Poloz deserves credit for moving swiftly and decisively to prevent the current crisis from plunging Canada into a depression, whoever succeeds him will inherit an even tougher task in eventually unwinding the extraordinary measures the bank is implementing now to save the economy in the short term.
The Bank of Canada managed to guide the country’s economy through the previous crisis and its aftermath without resorting to the quantitative easing (which is just a technical term for printing money) that its peers in the United States and Europe adopted.
Not this time.
Since it unveiled its plan to buy a minimum of $5-billion a week in Government of Canada bonds on March 27, the central bank has gone all-in on QE. Indeed, it is also buying provincial treasury bills and a host of corporate debt instruments for the first time in its 85-year existence. This is definitely not your grandfather’s Bank of Canada.
When the U.S. Federal Reserve Board resorted to quantitative easing in 2009, the main goal was to drive long-term interest rates lower to encourage private borrowing and boost the stock market, creating a “wealth effect” to buoy investor confidence. But that is not the principal objective the Bank of Canada is pursuing in embracing QE now. Rather, its main aim is to avoid financial markets from seizing up as investors contemplate the colossal quantities of debt Canadian governments will accumulate during this crisis.
In its March 27 statement, the bank explicitly said it was moving to “to address strains in the Government of Canada debt market.” It added that its debt purchases would begin with “a minimum” of $5-billion a week in federal bonds on the secondary market, and that the bond-buying program would continue “until the economic recovery is well underway.” That could be months, if not years, down the road.
In other words, the central bank has signalled that it is willing to print as much money as is needed to finance the unprecedented spending Ottawa is undertaking to get us through this crisis. It has also undertaken to buy provincial treasury bills, effectively bailing out financially weak provinces – specifically, Newfoundland and Labrador – that have been or could be shut out of the private bond market.
Bailing out a province that owes its current dire straits to decisions made by past and present political leaders is not typically the job of the central bank. A previous Newfoundland government made political decisions to embark on the disastrous Muskrat Falls hydroelectric project and ramp up provincial spending as if its oil boom would last forever. If Newfoundland needs help now, Mr. Trudeau should assume the political responsibility for a bailout rather than shunting it to Mr. Poloz.
The Bank of Canada’s move to include provincial treasury bills in the basket of financial instruments it is willing to buy sends a strong signal to investors that it is safe for them to hold such assets. Even so, the bank purchased $2-billion in provincial money market instruments in the two weeks to April 8 alone. That suggests Newfoundland may not be the only province that’s in trouble.
It is the central bank’s federal bond-buying program that carries the greatest long-term risk, however. Printing vast sums of money cannot go on for long without creating even bigger problems than the ones that it seeks to solve in the short-term. Financial markets have not questioned the ability of the U.S. Fed or the European Central Bank to do “whatever it takes” to keep their respective economies afloat.
It’s unclear whether they will be as indulgent toward this country.
Unlike the American greenback, the Canadian loonie is not a global reserve currency. And Canada is not a member of a wider union, as in Europe, with richer partners willing to cut us slack in order to save a common currency.
How then will global financial markets come to view a Bank of Canada that prints money as if there’s no tomorrow? The longer this crisis lasts, the scarier the answer risks becoming. Mr. Poloz’s successor will face a much tougher job as a result.
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