Poloz Says Bank of Canada Was Close to Cutting Interest RateBy and
Central bank maintains overnight benchmark at 0.5 percent
Governor cites large amount of uncertainty for holding back
Governor Stephen Poloz said Bank of Canada policy makers “actively” discussed the possibility of adding more stimulus into the economy, but chose to hold off given the large number of unknowns including global political uncertainty.
Earlier Wednesday, Poloz cut his growth forecast on weaker shipments to the U.S. and tougher government mortgage rules that will curb home re-sales. The Ottawa-based central bank held its benchmark interest rate at 0.5 percent even as it pushed its target for a return to full output back to mid-2018.
“Given the downgrade to our outlook, Governing Council actively discussed the possibility of adding more monetary stimulus at this time, in order to speed up the return of the economy to full capacity,” Poloz said in his opening statement at a press conference after the rate decision. “However, we identified a number of significant uncertainties in the current context that are serving to widen the zone of balance within our risk-management framework.”
The comments are among the most downbeat from Poloz in months and suggest his patience with Canada’s sagging economy is coming to an end. Canada’s dollar fell on the comments, after initially strengthening by as much as 0.8 percent following the rate decision.
Poloz said at the press conference that “significant uncertainties” the bank is accounting for include the effects of the new mortgage rules, the path of exports, new fiscal measures and the effects of the U.S. election on business confidence. He added the bank was not yet “dead certain” and therefore left rates unchanged.
The bank cut interest rates twice last year to cushion the blow from crude falling below $50 a barrel and since then has been waiting to see if the moves were enough.
The currency, which initially rose after the rate decision, erased gains after Poloz’s comments at the press conference. The Canadian dollar was little changed at C$1.3102 versus the U.S. dollar at 12:20 p.m. Toronto time. Yields on two-year government bonds fell 3 basis points to 0.56 percent, after rising on the rate decision.
Poloz also said recent measures to curb vulnerabilities in the nation’s housing market will pare growth. Finance Minister Bill Morneau unveiled tougher mortgage rules on Oct. 3 to head off the risk of a crash in Vancouver and Toronto.
In his opening statement, Poloz said the housing measures aren’t a barrier to cutting interest rates. In fact, lower interest rates and stricter macroprudential regulations would actually improve the policy mix, he said.
“A combination of lower interest rates and more stringent macroprudential policy would likely work to reduce both financial stability risks and the risk of an undershoot of inflation at the same time,” Poloz said. “This is because interest rate changes have their largest effect on inflation risk, while stronger macroprudential settings will lead to a higher quality of household indebtedness over time.”
On the plus side, the federal government’s fiscal stimulus should provide a 1 percent boost to GDP growth by early 2018, the Bank of Canada estimates. It also laid out a case that the worst of the damage from an oil-shock is passing, saying that business investment will pick up after a 60 percent drop from 2014 levels.
“After incorporating these weaker elements, Canada’s economy is still expected to grow at a rate above potential starting in the second half of 2016, supported by accommodative monetary and financial conditions and federal fiscal measures,” policy makers said in the statement. “As the economy continues to adjust to the oil price shock, investment in the energy sector appears to be bottoming out.”
Falling gasoline prices and slack in the economy has kept inflation at or below the central bank’s 2 percent target for almost two years. Policy makers said Wednesday that inflation is now headed back toward 2 percent as the one-time drop in gas prices fades away.
For now, the current interest rate is appropriate, albeit at a time of heightened uncertainty, Poloz said.
“They have a reasonable forecast for the Canadian economy,” Nick Exarhos, an economist at CIBC World Markets in Toronto, said by phone. “The point is there is only a thin margin of error between any further disappointments and another rate cut.”
— With assistance by Erik Hertzberg