This opinion piece by Governor Stephen S. Poloz was published in the National Post on April 18, 2020. The Governor discusses the actions taken by the Bank of Canada and other authorities during the COVID-19 pandemic to bridge Canadians through the downturn and lay the foundation for recovery.
Bridging through the downturn, laying a foundation for recovery
The COVID-19 pandemic is having tragic consequences worldwide, and measures to contain it are hitting all economies hard, especially in commodity-producing countries like Canada. Our economy entered the pandemic in solid shape, but we are experiencing the sharpest economic contraction in history.
Earlier this week the Bank of Canada published its quarterly Monetary Policy Report. Usually, we provide a detailed forecast for the economy and inflation, but this time we presented two plausible scenarios of how the contraction and subsequent recovery might unfold. Given the extreme uncertainty about how long containment measures will last, offering a precise numerical forecast equates to false precision, in our view.
We feel we need to be frank with Canadians about what we don’t know. But I’d like to reassure Canadians about what we do know: the contraction will be temporary. Comparisons to the Global Financial Crisis or the Great Depression are unhelpful. Instead, this is more like a natural disaster—we are stopping the clock on the economy until the situation is under control. When the danger has subsided, we can restart the clock and gradually start going about our business again.
At this point, we do not know how long the clock will be stopped, or how we will sequence a restart. That will depend on how well our efforts to “flatten the curve” work. It starts with each of us practising physical distancing and depends on our healthcare professionals. Their courage and selfless commitment is admirable, and critical. We should keep doing all we can to make their jobs easier.
The longer the clock is stopped, the more work will be required to heal the economy afterward. Right now, what we can say is that a positive scenario, where the economy regains significant traction over the summer, remains plausible. Public authorities are working hard to make that prospect more likely.
Economic authorities have an important role to play in helping Canadian families and businesses weather the shutdown and prepare for the recovery. Putting a floor under the economy now and laying a strong foundation for the recovery provides the best chance of seeing things pick up smartly later on.
Central to this effort have been the powerful and flexible actions that federal and provincial governments have put in place. Importantly, these actions are designed to expand in line with the pandemic’s impact on the economy. At the same time, wage subsidies maintain the relationship between employers and employees, so that the recovery can be as robust as possible.
Complementing these efforts are programs being offered through a number of federal agencies to address the availability of business credit. Canada’s major banks are playing a key role in delivering these programs, thereby maintaining their established relationships with customers. They have also introduced plans to defer mortgage payments and reduce credit card interest rates.
For our part, the Bank has acted quickly to lower interest rates to their lowest possible level. This makes it easier for many families to pay their mortgage, carry other debt or get the essentials they need. It also helps businesses stay afloat and keep their valued workers.
For low interest rates to work, the financial system has to function well. That means credit channels need to be open. Making sure of that is our top priority.
When uncertainty about the future is high, financial markets tend to seize up, and a credit crunch can emerge. We have taken several actions to unclog key lending channels, adding over $200 billion of liquidity, or around 10 per cent of Canadian GDP. As I said recently, no one has ever criticized a firefighter for using too much water. When the system demands more liquidity, the central bank must provide it. Later, when financial tensions ease, liquidity needs will diminish, and the expansion of our balance sheet can reverse over time.
These programs are working. We have seen improvements in key borrowing channels and in the overall functioning of our financial system, and our programs will continue. The economy has never seen a shock like this before, and that calls for an unprecedented response. The Bank of Canada will do what it takes to support the financial system and the economy, and lay the conditions for future economic growth.
I am confident that the actions taken by the Bank, other public agencies and governments across Canada will help us meet this challenge. Most of my confidence, though, comes from the Canadian spirit, which has always been based on hard work and ingenuity. We have seen both in abundance during the crisis, including many innovations around how we work, shop and interact. I expect that we will emerge from this with an even more resilient Canadian economy.