Poloz: Not 'really helpful' for markets to focus on neutral range for rates
Bank of Canada Governor Stephen Poloz said policy makers will need to keep interest rates stimulative for now to help the economy adjust to lower oil prices and trade uncertainty.
In a speech in Iqaluit, the capital of the northern territory of Nunavut, Poloz said the global slowdown, coupled with a housing sector that is taking longer to adjust to tighter mortgage rules and higher rates, means the economy still needs the help of low borrowing costs. The governor expressed confidence the country will emerge from its current soft patch, though he was noncommittal on whether that would prompt him to return to a hiking cycle.
“That is why we said at our last interest rate announcement in March that the economic outlook continues to warrant a policy interest rate that is below the neutral range to help the economy work through this downshift in growth and keep inflation close to target,” Poloz said in the speech.
Poloz may be seeking to settle policy into an indefinite holding pattern, dismissive of the idea the economy is weakening but equally reluctant to suggest the future will be rosy enough to warrant higher borrowing costs. It’s an attempt to tone down some of the central bank’s own narrative on future hikes, while addressing recent market bets for cuts.
“Governor Poloz’s speech walked a fine line between causes for optimism and risks to the outlook,” Derek Holt, an economist at Scotiabank, said in a note to investors.
That balancing act was evident in the post-speech press conference, in which Poloz rejected the idea a recent inversion of Canada’s yield curve was signaling an imminent contraction. He said the inversion was “more statistical than indicative of a recession” and the phenomenon may become more regular because rates are so low.
Yet, he also encouraged investors not to read too much into the Bank of Canada’s forecasts around the neutral rate of interest.
The central bank’s latest estimates put the neutral rate at between 2.5 per cent and 3.5 per cent, versus a policy rate of 1.75 per cent, suggesting policy makers still see scope for borrowing costs to continue rising in the longer term. During the press conference, however, Poloz said there is too much uncertainty to use it as a real gauge for policy intentions.
“How we get there and when we ever get there depends on too many things for us to predict,” he said. “I wish markets would not interpret it as such a fine line.”
In his speech, Poloz didn’t make any explicit reference to raising borrowing costs. The central banker instead spoke about the economy’s ability to adjust, aided by a flexible exchange rate. He cited recent data -- the latest GDP number showed the economy expanded at a better-than-expected 0.3 per cent pace in January -- to highlight his optimism a recent slowdown will be temporary.
“There are challenges in the Canadian and global economies that we need to manage, but there are clear signs that Canada is adjusting to the challenges,” he said. “Recent economic data have been generally consistent with our expectation that the period of below-potential growth will prove to be temporary.”
He said officials expect both exports and investment to return to “positive growth” later this year. He underscored strength in the labor market and how adjustments to the oil sector will “eventually be completed.” Poloz also cited anecdotal evidence from firms telling officials “they need to make new investments,” aided by recent tax cuts by the federal government on capital costs.
Canadians also can’t forget the contributions that a floating exchange rate can make to the adjustment process, he said.
“We only have to look back a few years for an example,” according to Poloz, “following the oil price collapse of 2015.”
Poloz cited “numerous advantages” beyond natural resources that are acting as buffers for the economy and helping to create growth -- including a well-educated workforce growing through immigration, fast growth in key services-related industries and a “portfolio” of trade agreements.
--With assistance from Josh Wingrove