Speech by Bank of Canada Governor Stephen Poloz

Brian DePratto, Senior Economist | 416-944-5069

Date Published: March 5th, 2020

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For Bank of Canada, Coronavirus Outweighed Labour Market Resilience 

  • Bank of Canada Governor Stephen Poloz delivered the Bank of Canada's latest "Economic Progress Report" – a series of speeches meant to help explain the thinking that goes into interest rate decisions that do not have a Monetary Policy Report and press conference, such as yesterday's 50 basis point cut.
  • The anchor for the Governor's remarks was the resilience of the Canadian labour market, which, in the Governor's view, has been quite healthy, some regions aside. The health of labour markets is seen as a key source of resilience for the Canadian economy, but one that could "be seriously tested by COVID-19" depending on the length and scale of its impacts.
  • When the discussion turned to yesterday's decision, the Governor painted a fairly bleak picture of the landscape that informed it. He noted that business investment has been falling short of the Bank's expectations for the past three years, and there were signs that the U.S.-China trade war was affecting this sector, as well as exports. In both the January 2020 rate decision and earlier ones, the Governing Council determined that there was not enough near-term risks to justify a cut given the longer-term financial stability risks associated with cuts. It is notable that at those decisions (and yesterday's), despite the negative backdrop, the unemployment rate remains around historic lows and inflation more or less on target.
  • COVID-19 and a weak end to 2019 changed the calculus. The Governor highlighted the risk that even should the outbreak be contained in a relatively timely manner, consumer and business confidence could take longer to recover. And, even taking out one-off impacts such as the rail strike, growth was below 1% in 2019Q4, and at least some of this slowdown is seen as structural.
  • Thus, with the near-term risks outweighing the longer-term ones, the Bank took action, and today's speech reinforces that they remain ready to act again if needed. 
  • Interestingly, the Governor characterized the impact of lower rates as helping stabilize the housing market in the face of (potential) consumer confidence shocks. 

Key Implications

  • When the risks get big, the Bank of Canada gets to action. Governor Poloz made it clear today that the Bank sees COVID-19 as a serious threat to the Canadian economy, and one that comes at a particularly bad time given recent economic developments (labour markets excluded). The door to further easing is clearly open, with consumer and business confidence and labour markets areas to watch as bellwethers.  
  • If there was a missing piece in today's remarks, it was on the role of fiscal policy in addressing COVID-19's impact on the economy, which was mentioned only in passing. The Governor has in the past provided rough rules of thumb relating fiscal policy to monetary easing, which would imply that there is some scale of fiscal response that could obviate further monetary easing. As we noted with yesterday's decision, fiscal policy has an essential role to play in offsetting the COVID-19 shock as it can be targeted at affected regions/industries.  
  • Ultimately, given the clearly dovish bent on display today, a follow-up cut at the Bank's next meeting looks likely.

Note: The Governor will hold a press conference at approximately 2:15PM ET.