The recovery of Canada’s economy and housing market will heavily depend on measures that provide monetary stimulus directly to consumers, according to Bank of Canada Governor Stephen Poloz.
Once the coronavirus pandemic has passed, such stimulus actions need to “reach the ultimate borrower,” Poloz said in his recent remarks to the Ivey Business School in London, Ontario.
“The good news is that we began this episode with a healthy economy, inflation on target and the unemployment rate at its lowest in 40 years. Just as a healthy, fit individual is more likely to shake off COVID-19, so is the Canadian economy,” Poloz said.
This is especially important as longer-term mortgage rates were “sticky” after the BoC lowered its target overnight rate to a record level of 0.25% “because banks were still funding themselves at relatively steep rates in bond markets,” Poloz said. “Another complicating issue was that the fiscal policies so essential to a successful outcome would soon be putting significant demands on government bond markets, posing the risk that market conditions could again become strained.”
In early April, the central bank announced that it will keep the overnight rate at its “effective lower bound,” following an unprecedented three downward adjustments the month prior.
The strategy is crucial since in the present environment, downside risks are more prominent – and indeed, “far more dire” – than upside ones.
“This simplifies our risk management problem for the time being,” Poloz said. “Under normal circumstances, we would also be concerned with adding to financial vulnerabilities. After all, lower interest rates are intended to promote increased borrowing and therefore spending. We have not forgotten about financial vulnerabilities—we will put more weight on them in our risk management framework once we are confident that our primary objective will be met.”