BoC stresses caution on policies, uncertainty in outlook
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 “slower-moving, nagging issues” that keep him up at night: cyber threats to the financial system, high household debt levels and labour 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 five 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 ...,” 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.”