Low rates have ‘done their job’
Bank governor’s comments feed speculation about July 12 hike
OTTAWA— With the Bank of Canada nearing its next policy decision, governor Stephen Poloz is reiterating the message that his 2015 interest-rate cuts appear to have done their job.
Poloz said in an interview broadcast on business news channel CNBC that the Canadian economy enjoyed “surprisingly” strong growth in the first three months of 2017 and he expected the pace to stay above potential.
The comments fed speculation about a Bank of Canada rate hike as early as its next scheduled announcement in two weeks. If the central bank increases its key rate, the big Canadian banks will raise their prime rates, driving up the cost of variable rate mortgages, other loans and lines of credit tied to the benchmark rate.
Poloz credited the two rate cuts introduced by the bank in 2015 for helping the economy counteract the effects of the oil-price slump, which began in late 2014. The reductions also helped increase the speed of the adjustment, Poloz added.
“It does look as though those cuts have done their job,” said Poloz, who was in Portugal on Wednesday to participate in a forum hosted by the European Central Bank.
“But we’re just approaching a new interest rate decision so I don’t want to prejudge. But certainly we need to be at least considering that whole situation now that the capacity, excess capacity, is being used up steadily.”
More “hawkish” statements in recent weeks by Poloz and the bank’s senior deputy governor, Carolyn Wilkins, have suggested the bank is moving closer to its first rate increase in nearly seven years.
A softer-than-expected inflation report last Friday led some analysts to believe the bank might wait until the fall or later before introducing a rate increase.
But economists interpreted Poloz’s latest remarks Wednesday as a signal the bank may even hike the benchmark as early as its next announcement on July 12.
“He’s not going to give it away, but that’s a pretty solid signal that a July rate hike is very much on the table,” BMO chief economist Doug Porter wrote in a research note to clients.
Porter added Poloz’s comments also indicate that the governor is “comfortable” with oil in its current range of $40 (U.S.) to $50 per barrel.
Desjardins senior economist Jimmy Jean wrote: “This does not sound like a central banker who was profoundly shaken by the weaker-thanexpected (consumer price index) numbers of last Friday.”
The bank lowered its rate twice in 2015 to the very low level of 0.5 per cent to help offset the effects of the oil-price shock.
Poloz said the drop in oil prices set Canada’s economy back — causing the central bank to compensate by lowering interest rates — but that growth has rebounded with an “encouraging” pace in recent months.
While he said he expects growth to moderate to a more normal level, he predicted it would remain “above potential.”
Poloz, who participated in a panel with Bank of England governor Mark Carney, European Central Bank President Mario Draghi and Bank of Japan governor Haruhiko Kuroda, also said virtually every major area of the world seems to be gaining economic momentum — with the United States “way out in front.”