Governments, central banks need to coordinate: Bank of Canada

By David Ljunggren

OTTAWA (Reuters) – Governments and central banks need a certain amount of coordination so they can discuss policies and consider the implications on debt levels and financial stability over the medium-term, Bank of Canada Governor Stephen Poloz said on Saturday.

One good example was Canada’s 2 percent inflation target, which is jointly set between the federal government and the central bank, he said in a lecture to the Canadian Economics Association in Ottawa.

“Policy coordination around an agreed goal seems to hold out more promise than seeking some optimality condition,” he said.

Coordination was important since there were limits to how much government debt and private sector debt financial markets would tolerate, he added.

“A tight monetary/easy fiscal policy mix means a relatively slow accumulation of private sector debts and relatively rapid accumulation of fiscal debt. An easy monetary/tight fiscal policy mix would deliver the opposite dynamic,” he said.

“Either dynamic can eventually give rise to financial stability risks,” he said. “There is a meaningful trade-off in the policy space between the medium-term consequences for debt of monetary and fiscal policies.”

Poloz made clear he was not urging governments or central banks to take any particular mix of policy actions, saying that depended on specific circumstances.

He spoke against the backdrop of a Canadian economy that has been hamstrung by weak crude prices. The Bank of Canada cut interest rates twice last year to afford the economy some protection.

Poloz later said that as interest rates approached zero, cutting them further had a smaller effect. That said, maintaining high levels of stimulus was the right thing to do given the challenges facing the global economy.

“I’ve no doubt … those headwinds are easing, but they are still there, which is to say monetary policy is still having a big effect,” he told reporters.

The Bank of Canada says Canada’s recovery should benefit from a stronger economy in the United States, which takes 75 percent of all Canadian exports. Poloz expressed some surprise at weak U.S. job numbers released on Friday, but said U.S. data this year had been “all pretty good.”

In a question and answer session, Poloz said that adding even 0.1 or 0.2 percentage points to economic growth was “a huge deal.”

In a bid to boost weak growth, Finance Minister Bill Morneau unveiled a stimulus-rich budget in March, running up a much larger deficit than initially promised.

(Reporting by David Ljunggren; Editing by Alan Crosby)