Poloz Says Canada Rates on Hold for ‘Quite Some Time’

Bank of Canada Governor Stephen Poloz said his policy interest rate may remain unchanged for “quite some time” as the central bank weighs the risk of a sharp correction in housing prices against the threat posed by persistently low inflation.

Poloz said his October decision to drop language about the need for future interest rate increases was “more a movement towards honesty than dovishness,” and that his interest rate announcements were trying to project a neutral stance.

“We think that interest rates will stay where they are for quite some time,” Poloz, 58, said at a press conference after a speech in Montreal today. “So issuing a warning that they are almost ready to go up -- it’s not the right timing.”

The bank’s key interest rate has been at 1 percent since September 2010 and will probably remain there through next year according to a Bloomberg survey of economists. Inflation in the world’s 11th largest economy has slowed to 0.7 percent, below the 1 percent to 3 percent target band, and the bank said Dec. 4 that “downside risks to inflation appear to be greater” than before.

Poloz didn’t comment on the Canadian dollar’s decline in his remarks and said after the speech its value is set in financial markets alone. The currency weakened beyond C$1.07 per U.S. dollar last week for the first time in three years on speculation the Federal Reserve may curtail U.S. stimulus while the Bank of Canada keeps borrowing costs low.

No Target

The central bank doesn’t target the exchange rate, Poloz said in response to questions after his speech. The currency “is always the right value, because the market always gets it right,” he said in response to an audience question.

The Canadian dollar fell 0.5 percent to C$1.0639 per U.S. dollar at 4:13 p.m. in Toronto. It earlier touched C$1.0561, the strongest since Nov. 29. One dollar buys 93.99 U.S. cents.

“We have identified the risks that we face,” Poloz said at the press conference, referring to his interest rate announcement. “Some people consider it less clear, but I actually consider it more clear.”

Poloz reiterated in his speech the bank is watching the risk that inflation will stay below its 2 percent target, where it’s been since May 2012.

“Of course, when we are already below target, as we are today, we care more about downside risks than upside ones,” Poloz said in the speech. He reiterated an October projection that inflation will return to a target he called “sacrosanct” in about two years.

Bank Dilemma

Poloz’s speech underscored the dilemma the central bank faces as the economy recovers more slowly than the central bank forecast while household debt is at record levels as a share of income.

History has shown financial crises can spark falling prices, Poloz said, citing the Great Depression and the deflation that took hold in Japan in the 1990s.

“Today, the concern is that even though policy makers were successful in avoiding global deflation in the wake of the 2008 crisis, there is still a risk that inflation could creep down into deflationary territory as the aftershocks of this crisis persist,” he said.

Canada’s housing market has shown unexpected strength this year, the central bank said this week, with resales and starts remaining firm after Finance Minister Jim Flaherty tightened mortgage rules. The central bank has also warned that record consumer debt burdens are the main domestic risk to financial stability.

Record Debt

The ratio of Canadian household debt to disposable income rose to a record 163.4 percent in the second quarter on increased mortgage borrowing, and tomorrow Statistics Canada will update that figure for the third quarter.

Poloz said today home buying has picked up “mainly because people pulled forward their plans when mortgage rates started to move up during the summer.”

While the central bank’s base case assumes a “soft landing” in the nation’s housing market, “there is a risk that household imbalances could keep building and set the stage for a sharp correction down the road,” he said.

Gradual Buildup

“We really don’t see those kinds of bubble-like conditions” in consumer finances and the housing market, Poloz said at the press conference. “What we have had is a pretty gradual buildup over more than five years.”

Poloz also said in the speech that the Bank of Canada looks at risks through two lenses: the economic outlook and inflation, and financial stability.

“As we navigate these uncharted waters, we are especially vigilant in our lookout for risks that could push us off course,” he said.

He downplayed fears that extraordinary monetary policies employed by central banks around the world could trigger runaway inflation. “Central banks will need to drain that extra liquidity from the system at some point, as the economy heals,” he said. “While I don’t want to underestimate the challenge of getting that exit exactly right, I am confident that we have the ability to keep inflation from taking off.”

To contact the reporters on this story: Greg Quinn in Montreal at gquinn1@bloomberg.net; Andrew Mayeda in Ottawa at amayeda@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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