FINANCIAL POST

BANK OF CANADA URGES CAUTION AMID DEBT, LABOUR CONCERNS.

TORONTO• Bank of Canada Governor Stephen Poloz said policy caution and uncertainties around the economic outlook remain prominent in the central bank’s thinking, even as an economy running close to capacity increases the likelihood rates will eventually rise.

Poloz used his last speech of the year to highlight three subjects he called “slowermoving, nagging issues” that keep him up at night: cyber threats to the financial system, high household debt levels and labor market slack, particularly youth underemployment.

It was in the section on labour where Poloz provided the most insight on monetary policy, underscoring his belief there is slack that should be accommodated with low interest rates even if other indicators suggest borrowing costs should rise.

The Bank of Canada has kept rates on hold at its last two decisions and said it will be “cautious” with future moves.

“With the economy operating near potential, a mechanical approach to policy would suggest that monetary policy should already be less stimulative,” Poloz said. “However, as we said in last week’s interest rate announcement, we still see signs of ongoing, albeit diminishing, slack in the labour market.”

At the same time — beyond the uncertainties and labour market slack — the underlying trends in the economy are largely positive and suggest interest rates will be going up over time, Poloz said.

The Canadian dollar reversed losses, rising as much as 0.8 per cent after Poloz’s remarks to $1.2714 per U.S. dollar. The currency is down almost 5 per cent since early September, when the central bank adopted a more cautious stance to policy.

“The economy has made tremendous progress over the past year, and it is close to reaching its full potential,” Poloz said. “We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time.”

Poloz reiterated the central bank needs to take “uncertainties on board” and they will “continue to be cautious.”

Canada’s central bank chief also weighed in on cryptocurrencies such as bitcoin, calling them a gamble.

Poloz said currencies must act as a reliable store of value and should be able to be easily spent.

“What their true value is may be anyone’s guess — perhaps the most one can say is that buying these things means buying risk, which makes it closer to gambling than investing,” Poloz said. “All I will say to people intending to buy a so-called cryptocurrency is that you should read the fine print and make sure you know what you are getting into.”

Poloz acknowledged demand for digital cash could grow over time and policy makers are studying whether a case could be made for central banks to provide it.

“Bank staff are exploring the circumstances under which it might be appropriate for the central bank to issue its own digital currency for retail transactions,” he said.

At a later press conference, Poloz said the central bank’s own experiments with blockchain technology suggest it doesn’t have “substantial advantages” over the current technology for payment systems.

The frenzy surrounding cryptocurrencies is a “situation that has the ingredients of something that could be a significant disturbance” to the financial system, Poloz said, adding he hopes the system will treat bitcoin cautiously.

The charts on the price of bitcoin “looks like the lefthand side of the Eiffel Tower, doesn’t it,” he said, comparing it to the bubble in technology stocks almost 20 years ago. “You don’t see that very often.”