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Bank of Canada governor talks interest rates, the economy and answers a dumb question (really well)
I don’t know about you, but when I sit down across from my banker, I’m looking for certain things.
I’m looking for someone calm, cool and collected and a willingness to explain things to non-financially minded me.
I’m looking for someone who can help steer me in the right direction to navigate my financial future.
So, it was with some relief that I got that vibe when I recently sat down with Stephen Poloz, governor of the Bank of Canada.
Of course, he’s not my banker, he’s our banker. So I asked Poloz for a quick update on how we’re doing as a country.
The answer: not bad. We’ve been through a rough patch but things are generally looking up.
“Say a year ago, we thought everything was coming up very nicely,” Poloz told me. “Inflation was on target, unemployment at a 40-year low, we were basically getting to what I call ‘home,’ so we were in the process of gradually, tentatively moving interest rates into a more normal place.
“Then we stumbled in the second half of last year. Oil prices fell — a lot — especially Western Canadian oil prices and trade began to disappoint again, and investment related to that.”
That “stumble” was a global phenomenon, with bank analysis showing 48 countries slowed down all at the same time towards the end of last year.
“ …We think domestically we’ve had a detour,” Poloz said. “The economy is picking up speed as we sit here, but everybody is still worried about the global slowdown: how deep, or would it be persistent, or does it prove temporary, too? And it may hinge on some sort of trade agreement between the United States and China. That’s an important wild card in the outlook.”
And now, a note to readers: this column has not been written for bankers, financial analysts or advisers.
It’s aimed at people like me — people who don’t know a lot about how our national financial system works.
I mean I know it’s “the Bank of Canada.” I see its name on the currency in the now infrequent times I actually have cash in my pocket.
I know they’re the folks who set the interest rates.
I warned Poloz I was going to ask him a dumb question.
He smiled, and I asked: what exactly does the Bank of Canada do?
"We’re the banker for the government.” — Stephen Poloz
He used an interesting analogy. The Bank of Canada, he said, is a bit like a serene duck on a pond. On the surface, all seems calm, but “under the surface there’s lots going on.”
He then broke down the bank’s business.
“We’re doing multiple things. For one thing, the cash in your pocket, that’s run by somebody. That’s us,” he said. “The government’s debt, there’s a big stock of government debt out there, treasury bills and bonds — that whole thing is managed by the Bank of Canada. We’re the banker for the government.”
The bank also oversees Canada’s payment system.
“So when you write someone a cheque or use your credit card or debit card, it goes through a system and it gets exchanged, and your bank has to pay another bank, and that system is part of our oversight. It’s the stability of that system (which is) why we do the Financial System Review — we are responsible for creating a stable climate for that,” he said.
Monetary policy is another thing the Bank of Canada focuses on, which brings us to interest rates.
“Monetary policy is a very infrequent thing (that people think about),” he said. “You may only think about when your mortgage is coming up, perhaps. Or when interest rates are low, you may see an advertisement for car loans that are really low — well, in behind that is the Bank of Canada guiding rates up or down.”
Raising or lowing interest rates is one tool the bank uses to help steer Canada’s economy.
If the economy is slumping, lower rates make it cheaper to borrow money. That, in turn, can help stimulate investment and, thus, give the economy a kickstart.
If the economy is red hot and inflation starts to tick upwards (which is a bad thing), raising rates can cool things down a little to a more stable level.
On a personal level. higher rates mean you pay more interest on your debt. And since this province has the highest level of personal indebtedness in the country (as does our provincial government with its debt) higher rates mean we all spend a bigger chunk of our disposable income servicing our debts — household and government.
Right now, the Bank of Canada’s policy interest rate is 1.75 per cent. It’s due to update that rate on July 9.
I asked Poloz to give me a hint at whether the rate will go up, down or stand pat. He just laughed. No spoilers here.
Whether future increases will come or not depends on the big economic picture.
We’ve been in an extended period of lower interest rates because, frankly, we had to be.
“From 2008 there was a major global collapse. It could have been the second Great Depression. What prevented that? Fiscal policy and monetary policy across all the major economies and the developing economies, all at the same time. One of the consequences has been a period of very low — a protracted period — of low interest rates, and people take advantage of that.
“They borrow more. They buy a bigger house than would have otherwise, etc. The consequence for Canada is yes, we have a stock of debt and housing is a much larger share of the economy than it was ever historically.”
More Canadians carrying more debt is also a problem for Canada’s economy — one that the Bank also has to factor into its analysis.
My takeaway from this is that, right now, I should be looking at ways to minimize debt — avoiding taking on more loans and paying off what debt I can.
My hope is that if rates do go up, they’re being raised because the overall economy is stronger. Because while the Bank of Canada factors in economic data from all of Canada’s regions and, indeed, microdata on the economic health of individual Canadians, its decisions are designed to be good for the country, not necessarily for me.
“Every time we’re considering rates going higher, it’ll be appropriate for the average, but it’ll be inappropriate (for some people and regions) — not enough for the hot areas and too much for the cooler areas. This is always true, so we have to take that as a constant. We’re never perfectly correlated.”
Mark Vaughan-Jackson is The Telegram’s business editor. He can be reached at firstname.lastname@example.org