The Next Age of Uncertainty

Insights shared by Stephen Poloz, Special Advisor at Osler and former Governor of the Bank of Canada

Uncertainty is off the charts for leaders worldwide who are being pressed to prepare for more and forecast farther out. The geopolitical, economic, and financial volatility we are experiencing is not simply a run of bad luck but is the manifestation of underlying economic forces that are well known, including demographics, technological leaps, and rising income inequality.

“The Next Age of Uncertainty” may be the title of his book, but it also summarizes unique insights Stephen shared with us.

A former Governor of the Bank of Canada and a widely recognized economist with nearly 40 years of experience in financial markets, forecasting, and economic policy, Stephen now holds the position of Special Advisor at Osler to provide clients with strategic guidance regarding the financial system, trade, and economic policy both domestically and on a global scale. Prior to joining Osler, Stephen was the 9th Governor of the Bank of Canada and held senior positions at Export Development Canada and BCA Research. Stephen is an Honorary Certified International Trade Professional and a graduate of Columbia University’s Senior Executive Program. Previously a visiting scholar at the International Monetary Fund in Washington, D.C. and at the Economic Planning Agency in Tokyo, Japan, Stephen has taught economics at the University of Western Ontario, Concordia University and Queen’s School of Business.

How will companies need to adapt to thrive? We sat down with Stephen to get his perspective. We trust you will find these insights valuable.

Stephen, in the rapidly evolving landscape of technology and innovation, how do you see the role of central banks adapting to support and facilitate the growth of the tech sector? Are there specific monetary policies or regulatory approaches that you believe can best foster technological innovation while maintaining financial stability?

You’re asking about a connection between central bank policies and the tech sector. It’s important to highlight that there is no specific sectoral mandate for central banks related to technology. When a big productivity wave happens, central banks are supposed to just let it happen. Greenspan is remembered for how his policies contributed to the 2008 financial crisis. However, he did the right thing in holding interest rates unchanged when the economy was strong, because the strong economic growth at the time was due to the productivity benefits of the computer chip and the internet.

It takes courage for policy makers to hold back when everything is picking up speed. When the economy is strong, but inflation is not picking up, central banks are supposed to let that happen – keeping interest rates low to encourage a productivity wave and supply-led growth. Central banks often can’t help themselves though, knowing that inflation could be right around the corner when the economy is strong.

Looking at the situation we’re in today, macro signals are confused by a combination of strong demand and rising supply, this time due to the benefits of digitalization and AI. Interest rates are high because of inflation risk, while productivity is hard to measure with companies deploying technology to adjust operations and produce more capacity. Central banks understand all that, but it’s very difficult to navigate – especially at a time when you have huge government deficits that are stimulating demand. It’s an evolving landscape, and central banks will keep rates up until inflation risks subside, but that should be soon. Allowing rates to ease back down would keep capital more widely available for companies to develop new technologies and others to deploy new technology. If you keep interest rates elevated, you could nip the whole process in the bud, and you won’t get the productivity wave that you’re hoping for. If we get the timing right, there will be big productivity gains!

As technology continues to reshape industries and redefine traditional business models, what is your perspective on the potential impact of digital currencies and decentralized finance (DeFi) on the financial sector? How should tech CEOs navigate the changing landscape of digital currencies, and what role might central banks play in shaping the future of digital financial ecosystems?

The Bank of Canada has been given the mandate by the government of regulating all payment service providers, and there are thousands competing on costs and features. Of course, we can’t have a wild west when people’s money is at stake. Regulators create a sandbox for providers to play in with a series of protection measures for consumers.

Unfortunately, Facebook backed out of Diem – a permissioned blockchain-based stablecoin payment system. The value proposition of instant payments is real and needed, and competition is healthy. Traditional methods of payment are slow and with “know your customer” rules and other stipulations, heavily regulated. Central banks have to clear this up for everyone. The question arises, what role do central banks play when it comes to digital currencies? It’s an uncertain space, and central banks are studying CBDCs (Central Bank Digital Currencies) and should make a Central Bank Digital Currency available – to provide an alternative and set a standard for a reliable, digital currency. This is not the same as forcing people to use the CBDC, just making it available for those who want one. Some people will want to stay with cash and should be allowed to do so.

With the ongoing global challenges, including supply chain disruptions and geopolitical tensions, how do you envision the collaboration between central banks and technology leaders in addressing these issues? What strategies or partnerships do you believe can be effective in mitigating risks and fostering economic resilience, particularly in the context of the tech industry’s influence on global economic dynamics?

Supply chain disruptions and geopolitical tensions can have inflationary consequences. While central banks are interested in the issue, they don’t have an appropriate tool to address this. Of course, if the only thing you have is a hammer, then everything looks like a nail! When faced with a supply disruption that raises inflation, you may have to raise interest rates just a little to make sure people remember you’re on the job and you don’t allow inflation to stick to the fridge on its way by – to prevent a secondary inflationary effect.

However, supply chain disruptions are a very difficult problem for central banks to deal with. As an economist, what am I supposed to do about the chip shortage, for example, that I read about in the newspaper? Collecting more real-time data and a collaborative effort between technology leaders would make a difference. We need a collaborative response to deal with whatever shortages emerge to jointly address these issues in the future.

With the increasing emphasis on environmental sustainability and climate-related risks, how should the Bank of Canada be integrating these factors into its monetary policy and financial stability considerations? Are there specific measures or collaborations with other stakeholders that the Bank should be exploring to address the challenges posed by climate change in the context of monetary and financial policy?

Central banks lack the tools to fight climate change. However, they are adopting an interest in the issue – but for very indirect reasons. Volatile weather events, such as tornadoes, floods, etc. pose a direct climate related risk to the economy. We need to understand this but can’t do anything about it.

The more important issue to look at is when an economy has a convulsion because of climate outcomes, posing risks to businesses, banks, and insurance companies. These shocks can find a way into the fabric of our financial system. You never know what kind of disruption could take down your banking system. Central banks want to know that a bank or insurer is measuring their risks and is appropriately provisioned in case something bad happens.

Central banks are responsible for economic and monetary policy as well as the soundness of the financial system. If the financial system is falling apart, the economy can’t function. Hence, central banks have an interest in ensuring that banks and insurers are appropriately provisioning for climate-related shocks.

To learn more about Stephen and/or connect with him, visit the Osler, Hoskin & Harcourt website.