Path back to neutral interest rates is ‘highly uncertain,’ Bank of Canada’s Poloz says

MONTREAL — Bank of Canada Governor Stephen Poloz said on Thursday interest rates would need to move up into a neutral range over time, but the path back is now “highly uncertain” and any future rate moves remain decidedly data-dependent.

Speaking to a business audience in Montreal, he said the impact of higher interest rates on highly indebted Canadians was a key uncertainty, noting it is one reason why the bank has been gradual in its approach to raising rates.

“We judge that we will need to move our policy rate up into a neutral range over time … However, the path back to that neutral range is highly uncertain,” Poloz said.

Poloz also noted that business investment has been less robust than modelled in recent years, with the future of the global trade environment “highly uncertain,” though the bank expects investment spending to regain momentum this year.

“An escalation of the U.S.-led trade war would, or course, be negative for the outlook, but a resolution would be a source of new lift for the global and Canadian economies,” he said.

The Bank of Canada has raised interest rates five times since July 2017, but has kept them unchanged since last October amid headwinds caused by lower oil prices and the weaker than expected housing market.

Analysts expect the central bank to stay on the sidelines at its next fixed rate announcement on March 6.

Poloz said Canada’s inflation-targeting framework has been successful, but monetary policy alone cannot solve all economic problems and even highly successful monetary policy can generate harmful side effects.

He noted monetary policy had been stimulating the economy for much longer than anyone expected when the global financial crisis hit in 2008, and that low interest rates had prompted people to take on a lot of debt.

Indeed, the average Canadian household now owes more than $1.70 for every dollar of disposable income, he said. For households that do not have mortgages, that ratio is closer to $3 for every dollar of disposable income.

“Given these elevated levels of debt, raising rates will have more of an impact on the overall economy than in the past,” Poloz said.

Poloz said on Dec. 17 that the pace of interest rate hikes in Canada could be interrupted or sped up depending on the economic circumstances.

© Thomson Reuters 2019

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