(Bloomberg) -- Canada’s economy will continue to require significant amounts of stimulus in the rebuilding phase, even with the potential for higher debt levels to fuel financial vulnerabilities, according to the outgoing head of the country’s central bank.

Bank of Canada Governor Stephen Poloz, in his final speech before stepping down next week, said the deflationary risks associated with the pandemic and lockdowns are more concerning than the potential build up of inflationary pressures and vulnerabilities due to the extraordinary measures taken by policy makers.

“Although a minority of observers worry that these extreme policies will create inflation someday, our dominant concern was with the downside risk and the possibility that deflation could emerge,” Poloz said, according to remarks prepared for a speech to the University of Alberta.

The governor has been forced to take unprecedented action just to keep credit markets from seizing up -- cutting the benchmark rate to near zero, injecting more than C$300 billion ($210 billion) of cash into financial markets and undertaking the central bank’s first-ever foray into large-scale purchases of government debt. That’s raised some concern the steps could be inflationary or creating unsustainable debt loads once the economy rebounds.

However, “the downside risks were sufficiently dire that there were no relevant trade-offs for monetary policy makers to consider,” Poloz said. “Deflation interacts horribly with existing debt, the two main ingredients of depressions in the past,” Poloz said.

Sharpest Contraction

After spending his seven-year term repairing the damage from the previous recession, Poloz is ending his tenure with the coronavirus shock unraveling his efforts. Canada’s economy is now in the midst of its sharpest contraction since the Great Depression with the unemployment rate at 13%.

Poloz said the central bank’s efforts were primarily meant to ensure financial markets function, even though those same actions will also “become an important source of economic stimulus down the road.”

“We are focusing our efforts on making sure the economy has a solid base for recovery,” he said.

The efforts seem to be working, with financial markets performing well even with the risk that near-term cash demands from governments may put renewed strain the system, he said.

He also singled out the need to generate growth to ease debt loads on government. “Getting the economy back onto its growth track—which is what is required if we are to hit our inflation target—is the surest means of servicing those debts over time,” he said.

Poloz emphasized the bank has its monetary policy limits, since the rate was at only 1.75% when the pandemic hit, which is why there is been an “unusually high” amount of coordination with the finance department.

He also said that policy makers will need to be “innovative and nimble” as they chart a future course and consider unwinding monetary stimulus, cautioning that current economic models aren’t built to deal with this sort of extreme level of uncertainty. That means policy makers will need to “rely heavily” on illustrative scenarios to guide their decisions, anchored on the central bank’s inflation target.

“I have every confidence that we will find our way back to prosperity here in Canada,” Poloz said.

©2020 Bloomberg L.P.