Bank of Canada Governor Stephen Poloz said his “controversial” decision to cut interest rates in January could be compared to life-saving surgery for the economy and any resulting increase in household debt should be viewed as a necessary side effect.
The main job of the central bank’s monetary policy is to focus on the 2 percent inflation target, Poloz said Sunday during a panel talk at the Basel-based Bank for International Settlements, which posted video of his comments Monday. The Bank of Canada cut its benchmark interest rate by 25 basis points to 0.75 percent amid a plunge in global prices for crude oil, the nation’s largest export.
“If the doctor says you need surgery to avoid death, the side effects usually don’t deter you, you just go ahead and manage them somehow,” Poloz said. “Other issues must be subordinate and I think of them as side effects.”
In its semi-annual Financial System Review released this month, the central bank called elevated household debt one of Canada’s “key financial system vulnerabilities.” Containing financial-system risks isn’t necessarily the central bank’s responsibility, but rather should be contained with “macro-prudential” policies, Poloz said in the BIS panel.
Poloz said the Jan. 21 rate cut was “very controversial” because it raised questions about stoking household borrowing. He defended the move by saying the damage to the economy from the oil shock meant debt ratios would have risen anyway as incomes fell, and the stimulus was aimed at new borrowers with little debt.
“When we cut rates to stabilize the economy we don’t picture some heavily indebted household going out and adding to their debt pile, rather we picture a household with no debt at all deciding finally to buy a house and taking out a mortgage,” Poloz said.
Household credit-market debt was 163.3 percent of disposable income in the first quarter, compared with a revised record 163.6 percent in the fourth quarter, Statistics Canada said June 12. The debt has built up alongside the lowest mortgage rates in decades, record home prices and a surge in condominium building in Toronto and Vancouver.
“Even though financial stability concerns are very important to us we must keep them in their proper place,” Poloz said. “We must acknowledge of course the possibility that financial stability risks at some point become so great that they become primary, but preventing this is the job of macro-prudential policies, not usually the central bank.”
The drop in oil prices means the economy won’t return to full output until around the end of next year, the Bank of Canada said in an April quarterly forecast. Inflation advanced 0.9 percent in May from a year earlier.
Poloz’s comments were the last by a Bank of Canada official before a July 15 rate decision.