Governments, central banks need to coordinate: Bank of Canada

Sat Jun 4, 2016 3:17pm EDT
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By David Ljunggren

OTTAWA (Reuters) - 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.

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.

Coordination was important since there were limits to how much government debt and private sector debt financial markets would tolerate, he added.

"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."

Poloz made clear he was not urging governments or central banks to take any particular mix of policy actions, saying that depended on specific circumstances.

He spoke against the backdrop of a Canadian economy that has been hamstrung by weak crude prices. The Bank of Canada cut interest rates twice last year to afford the economy some protection.   Continued...

Stephen S. Poloz, Governor of the Bank of Canada, speaks at the Milken Institute Global Conference in Beverly Hills, California, U.S., May 3, 2016. REUTERS/Lucy Nicholson