Bank of Canada Governor Stephen Poloz said interest rates will probably be lower than they have been in past economic cycles once the current recovery is complete.
“There is a growing consensus that interest rates will still be lower than we were accustomed to in the past,” Poloz, 58, said in a speech today in Saskatoon, Saskatchewan, without being more specific. He referred to “shifting demographics” for an explanation, adding that “after such a long period at such unusually low levels, interest rates won’t need to move as much to have the same impact on the economy.”
The central bank’s key interest rate will probably remain at 1 percent for another year according to economists surveyed by Bloomberg News. Poloz today reiterated an April 16 rate decision that he is neutral on the direction of the next move as a buildup of slack in the economy contributes to weak underlying inflation pressure.
“We remain hopeful that rising global demand for Canadian goods and services, combined with the continued high level of oil prices, will stimulate business investment in Canada and shift the economy onto a more sustainable growth track,” Poloz said. Asked at a subsequent press conference if his next rate move would be an increase or a cut, he said, “we are expressing true neutrality on that question.”
Today’s speech, “Canada’s Hot -- and Not -- Economy,” focused on a theme of weak business spending that needs to recover to shift the economy away from debt-fueled consumer spending. Poloz said there are signs that consumers are avoiding adding to record debts as interest rates remain low.
“What I really think we are observing is a high level of self responsibility through this,” Poloz said at the press conference. “There is all kinds of anecdotal evidence that people are choosing to buy less house than they qualify for because they don’t want to over-extend themselves, that our banks are underwriting very carefully.”
Some Canadian manufacturers, including makers of equipment, aircraft and building materials, may benefit from rising U.S. demand and a weaker currency, Poloz said. These industries make up about half of Canada’s non-energy exports, he said. Others that may continue to struggle to be competitive include makers of automobiles, food and chemicals, he said.
Manufacturers that survived the recession should expand to fill orders as global demand grows, a process that isn’t well captured by the central bank’s traditional economic forecast models, Poloz said.
“The downturn that we went through wasn’t just a matter of companies cutting back on production and then waiting for the recovery to come,” he said at the press conference. “A number of companies just couldn’t last,” he said.
“It’s more like a post-crisis repair job for the economy as opposed to a classic recovery,” he said. “Frankly, we don’t have models for that, we’re just watching it happen.”
The Canadian dollar’s past strength was linked to rising commodity prices and a weaker U.S. economy and put pressure on some manufacturers, Poloz said. Signs of momentum in the U.S. economy have weakened the currency in recent months, he said.
Canada’s dollar was little changed after the speech, trading at C$1.1021 per U.S. dollar at 5 p.m. in Toronto. Poloz, answering questions after the speech, declined to predict the currency’s future value.
The central bank sets interest rates to keep annual inflation at 2 percent. Poloz didn’t comment today on a report last week that showed consumer price inflation accelerated to 1.5 percent in March from 1.1 percent in February. He reiterated language from the April 16 interest-rate decision about his plan to ignore signs of temporary price gains this year in favor of focusing on a core inflation rate that probably won’t reach 2 percent until the first quarter of 2016.
“Total inflation will rise in the next few quarters,” Poloz said. “These increases will have, by definition, transitory effects on trend inflation.” The risks of weak inflation “remain important,” he said.
“Even if inflation runs up to the 2 percent area, don’t expect a Bank of Canada that is quite concerned about export competitiveness to become hawkish,” said Derek Holt, vice-president of economics at Scotiabank in Toronto, in a note to clients.