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. Poloz said 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. Poloz said coordination was important since there were limits to how much government debt and private sector debt financial markets would tolerate. "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." The governor made clear he was not urging governments or central banks to take any particular mix of policy actions, saying that depended on specific circumstances.
Poloz spoke against the backdrop of a Canadian economy that has been hamstrung by weak crude prices. The Bank of Canada - which cut interest rates twice last year to afford the economy some protection from slumping oil prices - hopes for a recovery lie with non-energy exports. But data released on Friday showed Canada ran a near-record trade deficit of C$2.94 billion in April.
During a question and answer session with the audience afterward, he said that while the economy was at a point where interest rate actions have a smaller effect, monetary policy is still providing support. He added that a decline in energy investment means that data are not yet showing investment that has been happening in other sectors of the economy and companies are close to feeling confident enough to start spending again. In a bid to boost growth, Finance Minister Bill Morneau unveiled a stimulus-rich budget in March, running up a deficit of nearly C$30 billion and pushing back the date when Ottawa expected to balance the books.