Bank of Canada Governor Stephen Poloz said struggling exporters won’t get much help from the recent decline in the country’s currency, and cited weakness in foreign and domestic demand as the reason why he surprised investors by dropping the bank’s bias to raise interest rates.
“A couple of cents here and there isn’t what causes an exporter really to change their behavior,” Poloz, 58, said in an interview at the central bank’s Ottawa headquarters yesterday. Asked how the weakening currency compares with other types of stimulus, he said, “I don’t really think of it at all in the sense of a rate cut.”
The Canadian dollar weakened beyond C$1.07 per U.S. dollar for the first time in more than three years after Poloz emphasized the risk posed by low inflation in his Dec. 4 interest-rate decision. The currency has lost 3.5 percent versus the greenback since Poloz took over the Bank of Canada June 3, underperforming all but five of 16 major currencies.
“We were disappointed on several fronts,” Poloz said when asked if dropping the bias in October was his biggest innovation since taking over from Mark Carney. “Any other governor sitting here would have done the same thing if the data behaved the way they did over the last six months.”
Canada’s currency fell 0.4 percent to C$1.0654 at 11:13 a.m. in Toronto today. One Canadian dollar buys 93.86 U.S. cents.
Poloz said some of the currency’s decline in recent months has been due to an improving U.S. economy.
“It’s not just the Canadian dollar that’s been moving in the last few months,” Poloz said. “We have had a bit of an unwinding of that stress that we went through and that is a positive thing,” he said. “It’s one of the signs that the world is healing.”
Exports and investment have been disappointing and inflation has been “lower than we can explain,” Poloz said. The Bank of Canada’s forecast is that the economy won’t reach full output until around the end of 2015.
“To continue to say, ‘Oh, by the way, interest rates could go up any minute,’ I think it’s being too aggressive,” Poloz said. “Given what we know today, something really unusual would have to happen to get us back to home base in less than two years.”
Employment among Canada’s export-reliant manufacturers has dropped 13 percent since June 2008, prior to the last recession. Factory production has been one of the weaker parts of Canada’s economy, with sales of C$50.1 billion in October still below the peak of C$53.3 billion set in July 2008.
CCL Industries Inc. said Nov. 22 it will close its aerosol container plant in Penetanguishene, Ontario, citing losses that came as the Canadian dollar strengthened over the past decade.
Poloz “ought to be a little bit happy that the Canadian dollar is going down somewhat,” said Martin Murenbeeld, chief economist at Toronto-based Dundee Capital Markets, by telephone. “The economy isn’t in a position where the Bank of Canada can raise interest rates.”
Inflation in the world’s 11th largest economy has slowed to 0.7 percent, below the central bank’s 1 percent to 3 percent target band, and the bank said Dec. 4 that “downside risks to inflation appear to be greater” than before.
One area of strength that has surpassed the central bank’s forecasts has been housing, with resales and starts remaining firm even after Finance Minister Jim Flaherty tightened mortgage rules last year. Policy makers have warned that imbalances such as potential overbuilding of condominiums in Toronto and consumer debt burdens are the main domestic risk to financial stability.
The ratio of Canadian household debt to disposable income rose to a record 163.7 percent in the third quarter as consumers increased their mortgage borrowing, Statistics Canada said Dec. 13. Canada’s real estate prices were the most overvalued among 28 countries tracked by International Monetary Fund researchers in the second quarter of this year, with the ratio of home prices to rents 85 percent greater than the historical average.
Poloz said in the interview that he doesn’t see a housing bubble in Canada, and the steady home-price increases since the global financial crisis are a predictable outcome of the central bank’s efforts to boost demand, he said.
“Usually, when you have a bubble, it looks like the left-hand side of an Eiffel Tower,” Poloz said. “It goes up really fast.”
“We’re pretty comfortable with our soft-landing belief” for the housing market, Poloz said.
Poloz has been more direct in rejecting the idea of a housing bubble than his predecessor Carney, said Doug Porter, chief economist at BMO Capital Markets in Toronto. Poloz, the former head of Export Development Canada, has also been more informal than Carney, the former Goldman Sachs Group Inc. banker who left to lead the Bank of England, Porter said.
“The style differences are striking, even the statements are much chattier,” Porter said, referring to the bank’s interest-rate announcements.
“The currency has ended up being weaker than it otherwise would have been under Poloz because he did move away from the hawkish tack rather quickly,” Porter said.
The central bank’s policy rate has been 1 percent since September 2010 in the longest pause since the 1950s. If Poloz keeps the rate unchanged into 2015, in line with economist forecasts, it would be the longest pause since the one from February 1944 to September 1950, according to central bank figures.
Poloz said he’s more concerned about restoring the economy’s health than avoiding a prolonged pause, speaking in a boardroom with portraits of former governors over his shoulder.
“We’ve got a job to do,” Poloz said. “We’re going to do what we can to make sure inflation gets back to normal, the economy gets back to normal.”
“We’re not going to do something silly here just because it’s been a long time.”