Feb. 22 (Bloomberg) -- Recent data on Canadian inflation and business creation are encouraging and support the central bank’s view that a recovery in the world’s 11th largest economy is under way, Bank of Canada Governor Stephen Poloz said.
While it’s too early to declare that a rebound is assured, economic data are supporting the message from the bank’s models that faster growth is coming, Poloz said in an interview in Sydney, where he’s attending the Group of 20 meeting of finance ministers and central bankers.
Canada’s inflation rate accelerated the most in 20 months, Statistics Canada reported yesterday in Ottawa, with the consumer price index rising 1.5 percent in January from a year earlier. Poloz last month kept his benchmark policy rate at 1 percent and said the risks of inflation staying below the 2 percent target had increased.
The inflation reading was “a little bit more” than the bank was expecting,’’ Poloz said today. The acceleration was “a little bit reassuring. It’s been hard to explain why inflation is so low.”
Inflation averaged 0.9 percent last year, Statistics Canada said last month, decelerating from 1.5 percent in 2012 to the slowest pace since 2009, when Canada’s economy was emerging from recession.
Yesterday’s report doesn’t represent “a fundamental pickup or reversal, it’s still in that lackluster zone,” he said. “As I said, it’s better than the opposite.”
Poloz reiterated that the Bank of Canada has a neutral stance toward its benchmark rate. Asked if looser policy would encourage parts of the economy that don’t need stimulus and not do much for the parts that are lagging, he said: “That’s essentially right. It’s why we posed it as a balance of risks.”
Canadian households held a record debt burden as a share of income in the third quarter of 2013, the latest period for which data are available.
“We have imbalances in the household sector already,” Poloz said. “Would we really want to take on the risk of making them worse? The answer is it depends on the balance of risks.”
Separately, Statistics Canada reported Feb. 7 that there were 2.69 million “active locations” for Canadian businesses in December, compared with a June tally of 2.62 million and 2.48 million in December 2012.
“It’s encouraging,” Poloz said today of the measure. “At least they’re up. If they were down, I’d be having the same questions about whether the data were telling us exactly what we want to know.”
‘On Our Way’
“Our models tell us we’re on our way, and that’s good,” Poloz said, adding that “models aren’t perfect.”
Poloz spoke as his colleagues from the G-20 nations gathered to discuss the state of the global economy, among other topics. Poloz said he’s “pretty optimistic” about the U.S. economy, adding “we just can’t take it for granted.”
Canada counts on exports for about one-third of its gross domestic product, and about three-quarters of those shipments go to the U.S.
In Europe, “you’ve got just enough to make you feel a little better than before,” Poloz said. Emerging markets seem to be managing the turmoil they’ve been facing “quite well,” he said.
“So again, you feel encouraged,” Poloz said. “But you don’t set aside the whole risk as a result.”
The Canadian dollar has lost 8.3 percent against its U.S. counterpart in the past 12 months, the worst performer among Group of 10 currencies after Australia and Japan. The depreciation quickened after the Bank of Canada adopted its neutral bias and stopped saying that it’s next policy move would be to tighten.
Poloz today reiterated that the bank doesn’t target the exchange rate, only inflation.
“I can be totally agnostic” on the exchange rate, he said. “The currency will be driven around by those international things, and all we can really do is do a good job with our own domestic objective, and that’s the inflation goal.”
Anyone looking for a quick boost to Canada’s manufacturing industry from the weaker currency should be patient, he said.
“I’d certainly expect at least a couple of years to pass before you had seen the full effects” of the weaker currency on factory shipments, Poloz said. “That’s basically because it’s not a pinpoint decision.”
Finance Minister Jim Flaherty, citing reports from the International Monetary Fund and Organization for Economic Co-operation and Development, said last month that there would be some upward pressure on Canadian interest rates from the decision by the Federal Reserve to pare its stimulus program of asset purchases known as quantitative easing.
Poloz said that pressure doesn’t apply to the bank’s policy rate. “If longer-term rates drift up in the U.S., ours almost certainly will,” he said. “That’s the sense in which we would expect to see upward pressure on Canadian interest rates.”
“I would expect that as tapering unfolds, the effect that QE has been having on longer-term interest rates will be unwinding,” he said. “I don’t think there’s much left there now.”
Poloz declined to quantify the impact on the Canadian economy that would flow if President Barack Obama’s administration blocked plans by Calgary-based TransCanada Corp. to build the Keystone XL pipeline, to connect output from Alberta’s oil sands with Gulf Coast refineries.
“The energy sector remains an important driver of growth,” he said. “That whole future doesn’t hinge on a single thing in any way. It’s all part of a bigger picture.”
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