Bank of Canada Governor Stephen Poloz said he dropped the central bank’s language about raising interest rates last week because there is a higher risk of inflation lagging the 2 percent target.
“Inflation has persistently been below target,” Poloz, 58, told lawmakers today during a House of Commons Finance Committee session in Ottawa. “Any negative inflation shock would bring us even further away from target, as opposed to getting closer, and in that context we decided that we should no longer have an explicit bias towards higher interest rates.”
Canada’s dollar reached a seven-week low after his testimony. The currency dropped the most in four months after Poloz’s Oct. 23 decision, when he removed language about higher rates that had been in place for more than a year. Poloz today reiterated that stimulus provided by the 1 percent policy interest rate is “appropriate” given “significant slack” in the world’s 11th-largest economy.
Concern about the pace of global demand is delaying growth in exports and investment, and Canada’s economic output is less than policy makers had expected, Poloz said. Inflation will accelerate to the bank’s 2 percent target by the end of 2015, he said, reiterating a forecast he gave at the Oct. 23 decision.
Lawmakers asked Poloz several rounds of questions about quantitative easing -- the U.S. Federal Reserve policy of purchasing assets to support growth. The Bank of Canada laid out the option of using quantitative easing in a 2009 paper during the global financial crisis and was “fortunate” it wasn’t used, Poloz said.
Speaking in Winnipeg, Manitoba, Deputy Governor Agathe Cote said the bank would consider the tapering of quantitative easing by the Fed as “something that’s very positive,” because it would be a sign that the economy is strengthening.
Answering questions from the audience, Cote said the bank remains optimistic because improving U.S. demand should lead to higher Canadian investment and productivity.