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


MONTREAL — Bank of Canada Governor Stephen Poloz on Thursday indicated he was in no rush to resume monetary tightening, saying that while interest rates needed to move up into a neutral range over time the path back was now “highly uncertain.”

Speaking to a business audience in Montreal, Poloz added that any future rate moves remain data-dependent and said the bank has been gradual in its approach to raising rates due to uncertainty over the impact this would have on highly indebted Canadians.

“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, in his most cautious comments in recent months.

He later told reporters that the bank has kept rates unchanged since October, after five hikes since July 2017, because the data is giving mixed messages.

“Let’s not lose sight of the fact that the labour market remains extremely strong,” he said. “So there are encouraging signs … it’s a bit of a mix.”

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

“The comments today were slightly more dovish than prior communications from the bank, given that the Governor conceded that the path back to neutral is not clear at the moment,” said Royce Mendes of CIBC Capital Markets in a note.

The Canadian dollar initially strengthened on the headlines, but turned lower again after the market digested the full context.

Poloz also noted that business investment has been less robust than modeled 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.

He noted monetary policy has been stimulating the economy for much longer than anyone expected, and that low interest rates have 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.

© Thomson Reuters 2019

Source: Financial Post

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