Poloz outlines coronavirus risks in speech
Bank of Canada Governor Stephen Poloz justified his decision to slash interest rates on Wednesday as a confidence-boosting measure that can help “bridge” the fallout from the coronavirus.
The impact of the shock combined with domestic headwinds could lead to slower growth through the first two quarters of this year, and possibly even further if the downturn undermines confidence, Poloz said in a speech on Thursday, a day after the central bank cut its policy rate by half a percentage point.
“There is a real risk that business and consumer confidence will erode further, creating a more persistent slowdown, especially given recent declines in stock markets,” Poloz said in prepared remarks of the speech.
Wednesday’s cut marked a reversal for Poloz, who had been one of the few central bankers over the past year to resist lowering borrowing costs -- in part because of concern cuts would fuel the nation’s high household debt levels. However, downside risks to the economy are now “more than sufficient” to outweigh continuing concern about financial vulnerabilities from cheaper money, the governor said.
In fact, he flipped the argument on its head -- as he had done in his last rate cut in 2015 -- arguing the move may actually improve financial stability.
“Indeed, declining consumer confidence would naturally lead to reduced activity in the housing market,” he said. “In this context, lower interest rates will actually help to stabilize the housing market, rather than contribute to forth.”
In the decision Wednesday, officials said the virus has driven economic activity down sharply in some regions, disrupted supply chains, pulled down commodity prices and prompted a repricing of risk that has tightened financial conditions. Poloz today put much of the emphasis on a major unknown: the impact the crisis could have on broader confidence levels.
“It is possible that the global economy will snap back quickly after the health professionals have managed the situation and conditions have returned to normal,” Poloz said. “However, the outbreak and its effects could be more persistent. Consumer and business confidence could be set back for a longer period of time, causing economic growth to slow more persistently.”
Poloz’s speech is what the central bank calls its Economic Progress Report, in which it aims to provide insight into deliberations following the rate decisions that aren’t accompanied by new forecasts. Poloz will give a press conference at 2:15 p.m.
Poloz reiterated much of the language from Wednesday’s statement, including that the central bank is prepared to “adjust” monetary policy further if necessary.