Canada Slack Means Poloz Should Drop Rate Bias, BMO Says

The time is right for Stephen Poloz to drop the Bank of Canada’s bias toward raising interest rates when he takes over as governor next month, according to Bank of Montreal’s Doug Porter.

A cooling housing market, lower commodity prices, an overvalued currency and the slowest economic growth in two decades argue against the central bank keeping its outlier status as the only Group of Seven central bank considering raising borrowing costs, said Porter, chief economist in Toronto at BMO Capital Markets.

“It seems the time is right for a fresh start and to drop the tightening bias,” Porter wrote in a note to clients today. “After all, the market has long since stopped listening, and Canadians appear to have long since heard the message.”

Poloz will have to deal with challenges such as sluggish economic growth and record consumer debts when he takes over Canada’s central bank, Porter said. Carney, who departs June 1 to head the Bank of England, has kept the central bank’s policy rate at 1 percent for more than two years, and has indicated since April 2012 his next move would probably be to raise it.

The world’s 11th largest economy will expand 1.6 percent this year, the slowest pace in two decades outside of the 2008-2009 recession, Porter said. That isn’t fast enough to help lower the unemployment rate or to do much to bring inflation from April’s 0.4 percent pace to the central bank’s 2 percent target, he said.

Poloz takes office June 3, and makes his first speech on June 19 followed by a July 17 interest-rate decision.

Canada’s dollar is overvalued by 5 percent to 10 percent based on “fundamentals” such as prices for major commodity exports including lumber, gold, wheat and natural gas, Porter said. Other risks include the pace of a housing market slowdown and growth of consumer debts that have already reached a record 165 percent of disposable income, according to the report.

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