Bank of Canada Governor Stephen Poloz said the nation will need a rebound in business investment to drive growth in coming years, a process that will require “stability and patience.”
Stronger U.S. demand for Canada’s exports is critical for confidence to improve and spending to increase, Poloz said in his first public speech since taking office June 3. Companies already have the capacity to take on more debt and increase investments, he said.
“This sequence may already be under way,” Poloz said in a speech he gave today to the Oakville Chamber of Commerce. “Right now, what we need most is stability and patience.”
While the Bank of Canada has been alone in the Group of Seven in signaling that its next move may be to raise interest rates, economists are anticipating Poloz won’t tighten policy until the end of next year at the earliest, in part to avoid a strengthening of the Canadian dollar that could undermine business confidence and exports.
The reference to patience suggests “a prolonged pause” in rates, Derek Holt, a Toronto-based economist at Bank of Nova Scotia, said in a note to investors. “The Bank of Canada is suggesting it sees the early nascent stages of a positive process that will take a long time to unfold.”
At the same time, Poloz suggested there’s little else the central bank can do to speed the rotation other than continue to provide stimulus.
“It’s a matter of letting Mother Nature do her usual job,” Poloz told reporters after the speech. “We have already set the table; interest rates are low, there is plenty of stimulus in the system.”
“If your question is, is there something else that we can do at this stage, we would say, well, no,” Poloz said. “We already have a great deal of monetary stimulus in the system and we can see that it’s working, and I think we need to be patient and allow those confidence effects to work themselves out.”
The Canadian dollar fell as Poloz’s remarks contrasted with comments from U.S. Federal Reserve Chairman Ben S. Bernanke that risks to that economy have decreased and policy makers could end bond purchases in the middle of next year. The currency weakened 0.7 percent to C$1.0278 per U.S. dollar at 4:03 p.m. in Toronto, on signs of faster monetary tightening in the U.S. that would make interest-bearing assets there more attractive.
Scotiabank doesn’t expect a Canadian rate increase until 2015. Economists surveyed by Bloomberg News earlier this year forecast the central bank will increase its key rate to 1.5 percent in the fourth quarter next year.
Canada’s benchmark interest rate has been 1 percent since September 2010, and for more than a year policy makers have said the next move will probably be an increase. The bank’s bias to raise interest rates contrasts with U.S. and Japanese central bank measures of buying assets to rekindle growth.
Policy makers are in the “early stage” of distilling information to be used in his first rate decision, scheduled for July 17, Poloz said. He declined to comment on whether he will keep the bias to raise rates.
Canada’s uneven recovery can be seen in Oakville, a city about 50 kilometers (30 miles) southwest of Toronto. Oakville is home to bankers who commute east to Toronto, as well as the local headquarters of Ford Motor Co. (F), which in 2011 closed a nearby plant that made the Crown Victoria and Lincoln Town Car sedans. Ford’s Oakville factory currently makes the Ford Edge and Flex and Lincoln MKX and MKT.
Poloz reiterated in his speech that “interest rates will rise at some point,” a comment he made in reference to past warnings to consumers about debts that reached a record 165 percent of disposable income.
Consumer spending will be more “neutral” for the pace of economic growth in the next several years as households focus on controlling debt, Poloz said, adding he isn’t “seeing any evidence of overheating” in the housing market.
The central bank’s own survey of company executives has shown a decline for investment intentions in recent quarters, while capital spending outside of home construction stalled in the first quarter, growing at a 0.7 percent annualized pace, according to Statistics Canada.
Poloz said the central bank can help boost confidence by keeping inflation “predictable, stable and on target” and providing information about the economy and the central bank’s “monetary policy response.”
Poloz, 57, who was chief executive officer of Export Development Canada, a government trade financing agency, before returning to the central bank, said manufacturing exporters were the segment of the economy “most profoundly affected” by the global recession. He likened the recovery to “postwar reconstruction” and said standard macroeconomic models can only “go so far” in capturing the dynamics of the global economy, requiring the central bank to gather insights “directly from business.”
“What needs to happen next is for export momentum to build and business investment to recover while the household sector settles into a more balanced and sustainable growth path,” Poloz said.
The Bank of Canada’s inflation-targeting framework is “sacrosanct,” Poloz said, adding there is “little room for conventional monetary policy to respond to negative shocks” when inflation falls below target and interest rates are low. While the bank targets a 2 percent annual rise in consumer prices, Canada’s annual inflation rate fell to 0.4 percent in April, Statistics Canada said last month, the slowest in more than three years.
“These comments reinforce our view that Bank will likely remain on the sidelines through the remainder of this year and probably well into the first half of 2014,” said John Clinkard, chief Canada economist at Deutsche Bank AG.
Today’s speech coincides with a meeting of the Bank of Canada’s board of directors. Carney had been originally scheduled to make the speech until he was named Bank of England governor-designate last year.
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