Exiting recession is risky business as stimulus distorts economic picture

OTTAWA—A Bank of Canada research paper is warning that in many ways the hard part is still ahead in the global experiment initiated by global banks to rescue the economy.

The paper, part of the institution’s quarterly Bank of Canada Review, says the evidence so far is that slashing interest rates and flooding markets with money through quantitative easing and other extraordinary measures appear to have worked.

The global Great Recession was stopped in its tracks and economies and financial markets have mostly stabilized.

But as central banks start pulling back their stimulative measures, as the U.S. is currently contemplating, the damage left behind in some sectors might become more apparent, the paper says.

And there is a danger central banks won’t be able to manage the exit properly, leading to losses in their balance books, loss of confidence and high inflation.

The paper makes clear that most of the risk lies in jurisdictions where central banks have gone to extraordinary lengths to rescue their economies, such as Europe, Japan and the United States.

But some of the challenges also apply to Canada. While Bank of Canada never introduced quantitative easing, it did take interest rates to historic lows and continues to keep them there, a policy that punishes savers and rewards borrowers.

A C.D. Howe Institute report Wednesday also looked at the low interest rate policy in Canada and concluded that it has led to economic distortions, including high household debt and home prices, while wrecking havoc on savers, pension funds and insurance companies.

The C.D. Howe paper urged the Bank of Canada to start hiking rates immediately.