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, while expressing confidence the country will emerge from its current soft patch.
In a speech in Iqaluit, the capital of the northern territory of Nunavut, Poloz said global economic underperformance, coupled with a housing sector that is taking longer to adjust to tighter mortgage rules and higher rates, necessitates that policy makers continue to give the expansion a nudge.
“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, according to prepared remarks.
At the same time, Poloz used much of the speech to tout the economy’s ability to adjust, aided by a flexible exchange rate, and to find new sources of growth. 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.”
Poloz’s comments are the first since a segment of Canada’s yield curve considered a potential recession signal inverted March 22 for the first time in more than a decade, prompting investors to speculate the Bank of Canada’s next move will be a rate cut instead of an increase.
Poloz is one of the few central bankers worldwide still talking about the need — at least over time — for rates to move higher. He didn’t make any explicit reference in his speech about raising borrowing costs, but his comment that interest rates remain below neutral suggest the Bank of Canada’s models still see scope for borrowing costs to continue rising in the longer term — unless officials dramatically change their estimates for neutral.
The Bank of Canada’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.
In his remarks, the Canadian central banker highlighted how the global economy has seen a slowdown in trade and investment because of heightened trade uncertainty, and he warned the impact could be permanent even if tensions are resolved.
But Poloz used much of the speech to strike a positive tone about the economy’s ability to adjust, even in the face of heightened trade uncertainty.
He said officials expect both exports and investment to return to “positive growth” later this year. He underscored strength in the labour 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.
The Canadian central banker also highlighted the contributions that a floating exchange rate can make to the adjustment process.
“We only have to look back a few years for an example,” said Poloz, “following the oil price collapse of 2015.”
He also 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.
In his speech, Poloz said that officials — after taking into account structural adjustments in the oil sector — can “see many areas of encouraging economic growth” in both traditional and cutting-edge export sectors.
“These data suggest that the mixed picture offered up by the Canadian economy today reflects some important structural changes beneath the surface,” Poloz said. “Judging what all this means for the outlook for inflation is of course a challenge for us.”