Former Bank of Canada Governor Criticizes Current Monetary Policy and Rate Decisions

In an unusual move, former Bank of Canada Governor David Dodge has criticized the central bank’s current approach to increasing interest rates as “too cautious.”

Mr. Dodge, who led the Canadian central bank between 2001 and 2008, said that he thinks current Bank of Canada Governor Stephen Poloz should focus more on the long-neglected issue of financial stability and take the opportunity to raise interest rates now that Canada’s economy is running at its full potential.

In a media interview, Mr. Dodge openly criticized Governor Poloz for keeping the central bank’s benchmark interest rate at 1% last week, and for stating publicly that he’s in no rush to tighten monetary policy further.

“While I understand why they want to be cautious… the fact that they are not moving to deal with what is a problem in financial markets arising from this very long period of very low interest rates I think is a mistake,” Mr. Dodge said. “Their’s would be more or less the mainstream view, whereas I put a little bit more emphasis on financial system distortions. I’ve lived through earlier periods,” he added in reference to the 2008 financial crisis.

Keeping borrowing costs low will only encourage households and businesses to keep adding debt, risks that should factor in to the central bank’s decision making, continued Mr. Dodge, who is now Co-chair of the Global Market Monitoring Group, a think tank that focuses on risks to the global economy. Interest rates could rise by a full percentage point and still remain below the 3% that the Bank of Canada estimates is “neutral” for the economy -- neither stimulative nor contractionary, he added.

Mr. Dodge’s comments came a day after Bank of Canada Governor Stephen Poloz testified before the House of Common’s Finance Committee and said that the central bank is taking a cautious approach to further interest rate increases. Governor Poloz has signaled in recent media interviews that he is concerned about consumer debt levels and the impact rising interest rates could have on Canadian households. While government debt levels are low, Canada has the most private sector debt relative to Gross Domestic Product among Group of Seven nations.

“If we think we are actually growing at about the capacity of the economy and are pretty much balanced, then indeed we should have rates that are higher than they currently are,” Mr. Dodge said to Bloomberg News.

The Bank of Canada’s latest credit data shows that growth in debt financing is slowing from elevated levels earlier this year. However, 2017 is on pace for the strongest year since the 2008-2009 recession. Total business and household credit in the economy reached $4.08 trillion in September, 7.2% above 2016 levels. The increase is mostly due to a surge in borrowing by businesses, which have increased credit by 9.1% from a year ago, accounting for 60% of all credit taken out in the economy over that time.

“The bank talks about the household sector, which is worrisome,” said Mr. Dodge. “But we also have a number of corporations which are overextended, which is also quite worrisome from the perspective of future macro-financial stability.”