The second-in-command at the Bank of Canada called on businesses and governments to step up to boost the country’s bottom line, and provide the central bank more wiggle room to respond to a financial downturn.
The bank’s monetary policy tool kit can only take the economy so far, senior deputy governor Carolyn Wilkins said in Toronto on Wednesday during a speech that outlined the need for economic innovation and investments from a range of actors.
Wilkins pointed to the current era of low neutral interest rates — the level where monetary policy neither stimulates nor holds back the economy — as leaving central banks with less flexibility to stimulate longer-term growth through rate cuts.
She listed a number of options already floated by policy organizations and a federal advisory panel: Investing in digital infrastructure, optimizing the tax and regulatory environment, and getting government and business to tag-team on education and skills training spending to make Canada more productive and more competitive abroad.
Wilkins said policies like these could “restore some lost manoeuvrability for monetary policy” and keep the global economy on a more even keel if other countries pursue a similar agenda.
Her speech came as the central bank considers how it can complement federal policies as it sets to renew its inflation-target framework next year with the federal government.
Officials at the central bank are also assessing different frameworks to see how effectively they create a stable environment for prices, growth and jobs.
An online consultation will launch in the spring, with reports later this year on what the bank hears from its international counterparts, domestic experts, as well as labour and civil groups.
“The right monetary policy framework and tool kit are foundational to economic well-being because they help create a stable environment for businesses and households to plan,” said Wilkins, according to a prepared text of the speech released in Ottawa.
“Monetary policy can only take us so far, though. It won’t raise trend growth in incomes and it won’t raise (neutral rates) either. Canada and other advanced economies will need to do more to support prosperity and avoid suffering from chronically slow growth and weak demand in the future.”
The message from the speech seemed to be “we’re doing our part, now do yours,” TD senior economist Brian DePratto wrote in a note. That may mean buying new software, or new ways of doing business.
“This is not a hard ask — rising productivity benefits us all — but as recent experience has shown, moving from words to action can be the hardest part, particularly in an elevated uncertainty environment,” DePratto wrote.
CIBC chief economist Avery Shenfeld said the ideas to boost productivity cited in the speech require global co-ordination or remain outside the central bank’s purview.
“Markets may take note of her concluding comment about refusing to take low interest rates as a given, but the ways mentioned to get out of the trap of low rates aren’t anything that’s going to be relevant in the coming year,” Shenfeld wrote.
Last month, the central bank held its trend-setting interest rate at 1.75 per cent, but hinted a rate cut could be in order in April if the economic outlook sours.
While the central bank expects the economy to expand by 1.6 per cent this year, there remains what Wilkins described as a troubling political and social backdrop: a trade war between the world’s top two economies, the United States and China, tensions in the Middle East and the novel coronavirus outbreak.
Answering questions after her speech, Wilkins said the bank is already hearing from businesses about the outbreak’s disruption on supply chains.
At home, Canada’s aging population will continue to act as a drag on growth, offset somewhat by rising immigration levels.
Federal Finance Minister Bill Morneau conceded at the start of pre-budget consultations that government spending would be key to spur growth in response to any downturns, but experts believe deeper-than-planned deficits have tightened the Liberal government’s fiscal constraints.
Wilkins said “decisive, ambitious policies” are needed to keep the economy humming.
“The payoff is clear: We’ll be more resilient to the next downturn, and we’ll secure long-term opportunity and prosperity for people in Canada and around the world.”