Bank of Canada says goodbye to 'gradual' pace of rate hikes
Bank of Canada Governor Stephen Poloz reiterated key themes from last week’s interest rate hike decision, including the need to return borrowing costs back to neutral levels, in his semi-annual testimony before the House of Commons finance committee.
The Bank of Canada pressed ahead last week with its fifth rate increase since it began tightening in 2017 and acknowledged for the first time in more than a decade that it expects to completely remove monetary stimulus from the economy -- raising speculation the pace of hikes could accelerate.
Normalization won’t be a ‘rapid process’
Asked about dropping the word “gradual” from last week’s rate statement, Poloz said that while the economy warrants higher interest rates, policy makers need to balance the risks of moving too slowly against moving too quickly, a process that they will need to evaluate continuously.
“It’s certainly not going to be a rapid process, it’s a process though that we wanted to make sure that we weren’t locked into a perception that we would move every second meeting, that’s what the markets said gradual meant,” Poloz said. “And we thought well, it might mean that, but it could easily not mean that, so we needed to clarify.”
More normal rates shouldn’t be difficult
The central bank governor faced a series of questions about whether Canadians would be able to cope with higher interest rates. Poloz said the reason he emphasized the notion of returning rates to neutral last week was to ensure Canadians could “digest” the idea “as an approaching fact.”
“When I bought my first house and rates were 12 or 13 per cent -- but that kind of goes into the rear view mirror and now we want people to understand that 3 per cent would be just kind of a normal thing, given the low inflation environment that we have established, and it shouldn’t feel difficult,” Poloz said.
Reiterates key themes
In his prepared remarks, Poloz said interest rates remain stimulative despite last week’s rate increase, core inflation measures remain “firmly” around the 2 per cent target, and financial vulnerabilities have stabilized.
The statement to lawmakers echoed those made on Oct. 24, including:
-Policy rates will need to rise to neutral -- which is estimated at between 2.5 per cent and 3.5 per cent Bank of Canada will continue to take into account how the economy is adjusting to higher rates Officials will pay close attention to global trade policy developments
-“The Canadian economy has solid momentum and continues to operate near its capacity,” Poloz said in the remarks, before taking questions. “The policy rate will need to rise to neutral to achieve our inflation target.”