Poloz Says Secular Stagnation May Curb Growth, Rates

Bank of Canada Governor Stephen Poloz said he can’t rule out an interest-rate cut if the economy worsens, following a speech where he blamed harsh winter weather for mainly sparking weaker-than-forecast growth.

“No, I cannot” rule out lowering the 1 percent policy rate, Poloz said at a press conference today in Halifax, Nova Scotia, while reiterating the bank’s neutral policy bias from its last decision March 5. “If the balance of risks were to shift so that the risks on the downside for inflation were increased, then we would need to reconsider.”

Poloz’s comments came after a speech where he said first-quarter economic growth may be a bit “softer” than forecast in January, and that the global economy may experience a “secular stagnation” that holds down output gains and interest rates. Canada’s dollar weakened after the speech and the press conference.

“The speech leans to the dovish side, not dramatically so relative to what we’ve heard before, but perhaps enough to soften the Canadian dollar and rate expectations slightly,” CIBC World Markets chief economist Avery Shenfeld wrote in a client note.

The Canadian dollar depreciated after the speech text was published, and further after Poloz’s comments about interest rates. It traded at C$1.1137 per U.S. dollar at 2:23 p.m. in Toronto, 0.8 percent weaker than late yesterday. One Canadian dollar buys 89.79 U.S. cents.

No Signal

Poloz declined to comment on the Canadian dollar’s value today, and said the lack of a reference to the currency in the last interest-rate decision wasn’t meant as a signal about the bank’s comfort with its level. He also declined to comment on campaign-trail remarks from Parti Quebecois Leader Pauline Marois that the French-speaking province may use the Canadian dollar and seek a seat at the Bank of Canada’s board if it voted to separate from Canada.

Growth in the first quarter of this year will be on the “soft side” mostly because of unusually cold weather, Poloz said in the speech, elaborating afterward that weather probably won’t explain all of the moderation. “This mostly seems to be attributable to unusual weather, but it bears deeper analysis,” he said in the speech.

While growth over the next couple of years will exceed the economy’s potential after a “soft” first quarter, the long-term outlook for economic expansion will be constrained by an aging population that is driving up savings and stemming demand, he said.

‘Demographic Forces’

“The demographic forces that are in play suggest that the growth trajectory that we converge on after the recovery period will be slower than our historical trend, and it will also be associated with lower equilibrium rates of interest,” Poloz, 58, said in the speech titled “Redefining the Limits to Growth.”

February’s annual inflation rate -- to be released Friday - - may be slower than in January’s 1.5 percent because of price gains last year that may not be repeated, Poloz said. Core inflation seems to be running at around 1.2 percent after looking through short-term volatility, he said.

Canadian consumer prices rose last February at the fastest monthly pace in more than 20 years due to higher costs for gasoline and clothes. Economists surveyed by Bloomberg project inflation this February rose by 0.6 percent from January and 1.0 percent from a year earlier.

Stable Rate

Canada’s economy has struggled to gain momentum since the 2008-2009 recession, leading the Bank of Canada to keep its policy interest rate at 1 percent since September 2010.

While Canada’s potential growth rate is at about 2 percent, the economy’s expansion will exceed that pace over the next couple of years, approaching 2.5 percent over that time. That will help bring inflation back to near the central bank’s 2 percent target, Poloz said.

Poloz “helped to frame the narrative heading into Friday’s CPI report,” said Ian Pollick, senior fixed-income strategist in Toronto at RBC Capital Markets. His comment “implies we need to focus on the monthly advance,” he said.

Canada’s economy has suffered from an increase in global savings fueled by businesses’ reluctance to make investments and deleveraging among households and banks, Poloz said. That impact was compounded by demographic-driven savings as populations in advanced economies age, limiting demand for goods, Poloz said.

“The possibility of secular stagnation needs to be taken seriously,” Poloz said.

Poloz said a combination of low demand and investment, and high savings that have been directed to less productive uses such as housing, may keep growth well below normal levels over a long period and mean low interest rates could prove to be less stimulative than in the past.

Ukraine Crisis

On Russia’s intervention in Crimea, Poloz said there isn’t much information yet to determine if there will be a spillover into the banking system and the world economy.

Ukraine “is a relatively small economy, nevertheless it’s an economy with loans in European banks and others and so does Russia,” Poloz said in response to an audience question after the speech. “So you can imagine there being spillovers from that crisis into global banking systems and then into national economies.”

(Updates with rate, dollar comment from first paragraph.)
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