Poloz Likely to Echo Carney About Canada Rate IncreasesGreg Quinn
Bank of Canada Governor Stephen Poloz’s first policy announcement will probably extend the longest interest-rate pause since the 1950s and keep warning debt-laden consumers that borrowing costs eventually will rise.
The benchmark rate on overnight loans between commercial banks will remain at 1 percent, where it’s been since September 2010, in a decision at 10 a.m. in Ottawa, according to all 20 economists in a Bloomberg News survey. Poloz, who took over the bank last month after running the government’s export-financing agency, will also release a new growth forecast and hold a press conference at 11:15 a.m.
Poloz, 57, has said consumers should be aware that interest rates will ultimately rise, even though robust growth in the world’s 11th-largest economy won’t arrive until exports and business spending recover. Modest gains in output and inflation mean official borrowing costs may not rise until the end of next year, a separate Bloomberg survey shows.
“The bank is going to remain on hold for an extended period of time,” said Mazen Issa, Canada macro strategist at TD Securities in Toronto. “There is no major macro catalyst for Poloz to alter the bank’s messaging.”
The last decision under Carney on May 29 said a rate increase would be needed after “a period of time.” All but one of 14 economists surveyed by Bloomberg expect that language to remain today.
The bank’s Monetary Policy Report will probably boost the forecast for growth this year while cutting it for 2014, reflecting first-quarter growth at a 2.5 percent annualized pace, Issa said. The bank’s prior report in April called for growth of 1.5 percent this year and 2.8 percent next year, while consensus forecasts now show gains of 1.7 percent and 2.4 percent.
“If Poloz wants to make his personal stamp in his statement it could be in the 2014 growth forecast -- it looks a little bit rosy,” said Avery Shenfeld, chief economist at CIBC World Markets in Toronto.
Poloz will resist giving up language about higher rates in the future because the central bank sees household debt loads as a potential threat to the economy and “dropping that warning might give a false impression” to consumers, Shenfeld said.
Household debts were 161.8 percent of disposable income in the second quarter, Statistics Canada said last month, and hit a record 162.8 percent in the third quarter of last year. Finance Minister Jim Flaherty tightened mortgage rules for a fourth time last year and has warned about the risks of overbuilding in Toronto and Vancouver, the country’s largest and third-largest cities.
While consumer spending is being discouraged and federal and provincial governments are reducing budget deficits, the exports and business investment Poloz is seeking haven’t yet emerged as a sustainable leader of growth.
Factory sales have declined 3.2 percent in May from the same month a year earlier, Statistics Canada reported yesterday, and weak exports have triggered the longest string of merchandise trade deficits in a quarter century.
While Poloz’s announcement is being published, Federal Reserve Chairman Ben S. Bernanke is scheduled to testify before the House Financial Services Committee in Washington. Canada’s dollar has weakened 1.9 percent against its U.S. counterpart over the last month and government bond yields have climbed on signs the Fed may begin tapering asset purchases later this year amid signs of a sustainable recovery. Canada’s benchmark stock index is under-performing U.S. equities for a third year after seven years of stronger gains.
By keeping language about raising rates, Poloz would remain an outlier among Group of Seven policy makers using extraordinary monetary policies. Canada’s 1 percent policy rate is the highest in the G-7.
Still, Poloz’s words suggest any increase is a long way off. In his first public speech June 19, he said what the economy needs most is “stability and patience” as Canadians wait for business spending and exports to improve.
Companies are biding their time. The central bank’s measures of business sales and investment optimism declined in its last quarterly survey of executives released last week. Thorsten Heins, chief executive offices of Waterloo, Ontario-based BlackBerry Ltd., asked investors for patience at the company’s annual meeting this month, following a surprise quarterly loss.
For Poloz, “it’s a matter of letting Mother Nature do her usual job,” he told reporters after his speech. “We have already set the table; interest rates are low, there is plenty of stimulus in the system.”