Bank of Canada Governor Stephen Poloz fancies himself a surgeon.
He compares cutting interest rates to life-saving surgery for the
economy. I consider it more like bloodletting, a terrible practice that
is now widely accepted as pseudoscience. According to Canada’s central
banker, if the interest rate cut resulted in an increase of household
debt, that should be viewed as a necessary side effect.
If the Bank of Canada has one job it’s to focus on the 2 per cent
inflation target and that means cutting the benchmark rate by 25 basis
points when global crude oil prices tumble. Or at least, that’s what
Stephen Poloz said to the central bank of central banks, the Bank for
“If the doctor says you need surgery to avoid death, the side effects
usually don’t deter you, you just go ahead and manage them somehow,”
Poloz said. “Other issues must be subordinate and I think of them as
Likewise, if a bloodletter tells me I need to balance my “humors”,
the side effects of losing so much blood won’t deter me. I’ll just go
ahead and manage them somehow.
Of course, what Poloz is really saying is that the
Bank needed to intervene to prevent death, or rather, a contraction of
credit and available money. The side effects of more household debt, the
prospect of higher prices in the future, the misallocation of resources
– those are all side effects where the alternative is deflation. And we can’t have that.
“When we cut rates to stabilize the economy we don’t picture some
heavily indebted household going out and adding to their debt pile,
rather we picture a household with no debt at all deciding finally to
buy a house and taking out a mortgage,” Poloz said.
That’s good to hear. Good that “we” as a nation are not further
binding our seniors, baby-boomers and students to debt, but rather the
coming-of-age middle class that have managed to secure a salary and
still have high hopes for the future. Yes, you there. The graduate with a
spouse, steady income, and no debt. Here, take this mortgage.
Household debt-to-income ratio is at 163.3 per cent. A surge in
condominium building in Toronto and Vancouver are using up real
resources. People care about the environment, but they don’t seem to
understand how central banks ensure resources for long-term use are
instead profitable in the short-term. Of course, the economy is a little
more complex than that. We can’t blame everything on the central bank, right? Poloz reminds us,
“Even though financial stability concerns are very
important to us we must keep them in their proper place… We must
acknowledge of course the possibility that financial stability risks at
some point become so great that they become primary, but preventing this
is the job of macro-prudential policies, not usually the central bank.”
Don’t blame me, I just work here.
Poloz’s interest rate cut in January “accomplished two things,” he told reporters last month.
“First, it reduced the downside risk to inflation by helping bring the
economy back to full capacity over our projection horizon. Second, the
cut helped mitigate the risk to the financial system by addressing the
drop in incomes and employment caused by the oil price shock.”
In other words, it bought us some time. The next interest rate announcement will be on July 15.