Changing of the guard at Bank of Canada adds to COVID-19 uncertainty: Don Pittis

In a time of ultimate economic uncertainty caused by COVID-19 and the lockdown to fight it, this week's shuffle at the top of Canada's central bank will only add to the confusion.

That's not to say that the newly appointed governor of the Bank of Canada, Tiff Macklem, who takes over from Stephen Poloz on Wednesday, will do a bad job.

But just as when Poloz replaced media darling Mark Carney, who set off to an even more glamorous and demanding job at the Bank of England only to be replaced by a relatively stodgy and unknown replacement, changes of leadership style at the top matter.

As it turned out, Poloz — appointed by the Harper government seven years ago in place of heir apparent Macklem — turned out to be an excellent choice as he rode the shockwaves radiating from the 2008 financial crisis with avuncular aplomb.

'Solid' is what you want in governor

"Oh, I think he's done a good job," said Joe Martin, director of Canadian business history at the University of Toronto's Rotman School of Management, referring to Poloz. "I think he's been solid and that's what you want in a central banker."

Of course in retrospect, there is always room for criticism, including the complaint that cutting rates to help the oil sector in 2015 gave the industry a false sense of security while further stoking consumer over-borrowing.

But even Martin's qualifier "solid" reveals how much the measure of a bank governor, like others in leadership roles, is based on qualities that are hard to nail down. And as with Poloz, the judgment of Macklem's fitness will be how he responds to crises that are by definition unpredictable.

Poloz faced surprises: the oil crash and U.S. President Donald Trump's unexpected disruption of trade. The fact that despite a long decline in unemployment, global inflation remained tepid even as markets soared. The ideas presented in an earlier analysis that Poloz would be a party-pooper, forced to raise interest rates after Carney's cuts, now looks very wrong indeed.

If anything, the Bank of Canada under the incoming governor is facing even more uncertainty in an already uncertain time, not least because Macklem remains an unknown quantity, said Martin, who has watched the new appointee in his role as dean at Rotman.

"He was [at the Bank of Canada] during 2008, and he knows what a bad crisis looks like," said Martin. Macklem was senior deputy governor until May 2014.

But Martin said in many ways, the incoming governor is untested. "I am not entirely comfortable he's the best manager in the world."

Martin says one-on-one Macklem is more affable than Poloz, but it is hard to know how that will translate into running an organization as large as the Bank of Canada. The Rotman historian says other unknowns that could lead to conflict include Macklem's climate change-fighting stance, his uncertain ability to "read the room" and perhaps most significantly, his independence from Finance Minister Bill Morneau who appointed him.

When the bank was founded by the Conservative government of R.B. Bennett in the 1930s, amid considerable rancour, it was a private institution divorced from government. Since then, it has grown closer, and in the current crisis, Martin says even closer co-operation between fiscal and monetary policy may not be a bad thing.

'Massive challenge' ahead

Of course, as the Canadian economy plunges into the unknown, there is enough that could go wrong to turn the job, seen only months ago as a career-clinching sinecure for the 59-year-old economist, into a poisoned chalice.

"Clearly, Macklem faces a pretty massive challenge," said Jacqueline Best, a University of Ottawa professor specializing in economic crises, who spoke just after wrestling with Zoom to teach a course called the Everyday Politics of the Global Economy. 

One of the things that impressed Best about Poloz was his ability to articulate how much the central bank does not know about the direction of the economy. That was especially clear in his recent speech where he reminded Canadians that the country could face either inflation or deflation and that deflation would have the most dangerous impact.

Deflation the big scary thing

"Generally, deflation is more of a problem than inflation so that's the big scary thing, getting into a deflationary spiral," said Best, who says one of the difficulties Macklem will face is that central banks can no longer depend on simple rules any more.

Best says that since the days of former U.S. central banker Alan Greenspan and then Carney after him, the role of governor has turned into that of a public media figure representing the face of the bank and of Canadian policy abroad.

As Poloz discovered, one of the many challenges of the job was rolling with the punches as Canada's powerful neighbour and its mercurial president changed policy in ways the Bank of Canada could not ignore.

Some commentators have suggested that in a bid to win the November election, Trump may try to pull out all the stops and spend like a Democrat, igniting inflation after all.

Whether Trump wins or loses, Macklem's term as governor will extend not just until the U.S. election but to the aftermath when perhaps he will have one of the most difficult tasks for a central banker: taking away the punch bowl when government, business and ordinary borrowers want the party to keep going.

Follow Don on Twitter @don_pittis