Bank of Canada Governor Stephen Poloz says the central bank may discuss the interest rate that would keep the economy at full output, a rate he said has been lowered following the global recession.
The central bank is researching what economists call a neutral interest rate, and will discuss the issue in the next quarterly economic forecast paper due in October, Poloz said in an interview aired today on CBC Radio’s “The Current” program.
Yesterday, Poloz kept his key interest rate at 1 percent, where it’s been since September 2010. The prolonged period of low borrowing costs has led to high debt loads, meaning that when interest rates do eventually rise, they will be more effective in slowing the economy than in the past, he said.
“The interest rate where things settle out, things are all done, is probably going to be lower than what we thought in the past,” Poloz told the CBC. “So much debt has been taken on during the course of this downturn that every uptick in interest rates that we get, whether it’s two years from now or what have you, is going to hit the cash flow of ordinary people bigger than it did in the past.”
Asked about the level of the “new normal” interest rate, Poloz said “this will vary from economy to economy, but the direction I think is pretty clear.”
Canada’s economy must grow for about two years before completing its recovery, so the question of a neutral policy rate won’t have a near-term impact on monetary policy, Poloz said in the interview.
“The most important point is that we are a long ways away from there,” he said. There is “lots of room to grow before that becomes the question we have to ask.”
Poloz also said the level of Canada’s dollar against the U.S. currency is justified in part by higher commodity prices, and other struggling exporters must find ways to compete.
“There is nothing that can be done about that except find ways to restructure business at a higher exchange rate,” he said. “That’s not to say that the current level is appropriate or inappropriate.”
Poloz said the currency’s level doesn’t justify him making public statements aimed at weakening it.
“If the currency was, if you like, ridiculously out of line with fundamentals then perhaps that’s when you would bring out that kind of weapon and see if it had an impact,” Poloz told the CBC.
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