In July of 2013, former Bank of Canada Governor Mark Carney will begin his new role as Bank of England Governor in London. He will be the first overseas Governor of the Bank of England and faces huge challenges in a country burdened with debt, unemployment and overwhelming public spending commitments. Carney leaves the Bank of Canada with an outstanding reputation, he is held with almost unanimous regard amongst economists in his decisive role in helping guide Canada through the economic meltdown and into recovery. Carney was named one of Time magazine’s “2010 Time 100” and “Central Bank Governor of the Year 2012” by the editors of Euromoney magazine. Beyond these accolades, he is one of the most recognizable and well regarded Bank of Canada governors in the nation’s history, and many believe that he was the only candidate who could have stood a chance against Justin Trudeau in the running for the leadership of the Liberal party. Many still speculate that when his term with the Bank of England ends, he may return and run for the leadership of one of the federal parties with hopes to eventually become Prime Minister.
Filling the shoes of the man who may have been the closest to a central banking superstar this nation has ever seen is Stephen Poloz, who was appointed as Carney’s replacement on June 3rd. His appointment was considered a surprise by many economists, who believed that the well regarded Deputy Governor of the Bank, Tiff Macklem, would be appointed as Carney’s replacement. Macklem served as Carney’s right hand man for the former Governor’s tenure, and many view the choice of Poloz as a snub to Macklem. Ultimately, it was the decision of Jim Flaherty, the Finance Minister to appoint the new Governor. Many speculate that Flaherty chose Poloz because he could be more easily influenced than Macklem. Regardless of Flaherty’s motivations for choosing Poloz over Macklem, Poloz faces numerous challenges in helping guide the Canadian economy through recovery mode all while preceding the universally popular Carney.
Poloz, however, is no slouch. He holds a doctorate in economics from Queen’s University, worked as Chief of the Bank of Canada’s Research Department, and was the CEO for Export Development Canada until his appointment as Governor. Export Development Canada is a Crown Corporation which assists and provides services to companies looking to export Canadian products. His position and experience in the export market have led many to speculate that he will try to soften the strength of the Canadian dollar through adjusting the Bank’s policy. He has expressed support for the ‘Dutch disease’ theory, in which a strong commodities market causes an influx of revenues for natural resources which strengthens the dollar and indirectly hurts the manufacturing sector’s export market. However, in his recent address to Parliament he stated that his opinion has changed and it would be a major policy change for the Bank of Canada to intervene in the value of the loonie, which has predominantly been determined solely by market forces. However, a change in the policy of the US’s Federal Reserve and the Bank of Japan has encouraged investors to use other currencies, such as the Canadian dollar, as safe havens for investment instead of the more traditional American dollar and the Yen. In response to this change, the Bank of New Zealand, which holds a historic similarity to Canada in monetary policy, has decided it would intervene in the strength of their currency, the Kiwi. Mark Carney was a strong believer in letting the market determine the strength of the dollar, but when other central banks do not follow this belief and interfere with the market, Canada may be forced to do the same. It will be up to Poloz to make this determination.
The most prominent issue that Poloz faces is not the strength of the dollar, however. It is instead making the determination on when to raise interest rates. In order to encourage consumer and corporate spending in the wake of the recession, the Bank of Canada has kept interest rates low. This allows for ‘cheaper money’, as people and companies can borrow without having to pay as much back in interest on their debt. However, high levels of household debt amongst Canadians and a concern of a housing bubble, particularly in hubs Toronto and Vancouver, suggests it may be time to restrict the flow of money to the economy. Raising interest rates is never a popular move and, despite its utility, will do little to raise Poloz’ popularity. Poloz is not an elected official, and because of this he should be able to do what is right for the economy without concern of public reaction. The recent passing of a Bill giving parliament greater control over Crown corporations leads many to believe that Poloz may not be as independent of political pressure as Carney was. Managing a trillion dollar economy recovering from a great economic shock is already difficult; to add politics to the mix is unfair. It is difficult to tell how Poloz will be judged, and inevitably it will be made clear if he is simply a puppet of Parliament or a man of conviction.
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