Bank of Canada Governor Stephen Poloz said the path toward higher interest rates is “highly uncertain” due to lingering questions around housing and investment, even as he stuck to his message that borrowing costs eventually need to head higher.

Poloz defended the central bank’s five rate increases since mid-2017, and cited two reasons for why he’s been on hold since October last year: the impact of higher rates on indebted consumers; and risks to the investment outlook.

“We judge that we will need to move our policy rates up into a neutral range over time, to a point where it is not stimulating or constraining economic growth,” Poloz said in a speech to the Montreal Chamber of Commerce. “However, the path back to that neutral range is highly uncertain. We will watch the data as they come in, and use judgement.”

The comments are consistent with Poloz’s efforts in recent weeks to inject more ambiguity about the timing of future increases -- while sticking to an overall rate hike story -- as the economy copes with a growth slowdown that the Bank of Canada has been insisting will be temporary.

Investors see only a small chance of another rate hike coming from the Bank of Canada. That’s at odd with expectations from economists at major banks, where there’s almost unanimity that at least one more increase is likely at some point this year. The next rate decision is March 6.

The Canadian dollar extended losses after the drop, and was down 0.3 per cent to CUS$1.3215 per U.S. dollar at 1:46 p.m. in Toronto trading. The dollar is up 3.2 per cent so far this year, the best performing among the world’s 10 most heavily traded currencies.

Yields on Canadian two-year bonds slipped slightly, trading at 1.792 per cent.


While Poloz didn’t comment specifically about the current economic outlook or weakness in the oil sector, he raised the possibility that investment may not be as robust as expected, particularly given uncertainty around global trade policy.

“We expect investment spending to regain momentum in 2019, especially in light of the government’s new accelerated capital depreciation rules,” Poloz said. “However, we must acknowledge that the future of the global trade environment is highly uncertain right now.”

On the impact of higher interest rates on highly indebted households, Poloz said it is “one reason” why the central bank has been “gradual” in its approach to raising rates.

He also highlighted that recent housing activity is “a little weaker than we expected,” and recent declines in home sales suggests “there may have been more froth in certain housing markets than previously thought.”

These uncertainties mean the Bank of Canada “will remain decidedly data-dependent as the domestic and international situations evolve,” he said.

Still Stimulative

Still, he reiterated how monetary policy needs to be forward looking and gauge how inflation will evolve in the future, which is why he had been raising borrowing costs as the economy absorbed excess capacity in recent years.

“In this context, the Bank began withdrawing its extraordinary stimulus,” Poloz said, adding that borrowing costs remain expansionary.

With the policy rate “still lower than inflation, it is clear that monetary policy continues to deliver stimulus to the economy today,” Poloz said.

Poloz also highlighted the benefits of raising interest rates gradually, to prevent the build-up of financial system vulnerabilities that could magnify shocks. Fiscal stimulus has also helped to give the central bank more scope to move rates higher, Poloz said.

“The bottom line is that the mix of monetary, fiscal and Macroprudential policies matters,” he said. “In certain circumstances, relying less on low interest rates to bring the economy home can mean a more resilient economy.”