No preset ‘path’ for rates, Poloz says

Bank of Canada governor Stephen Poloz looked to temper recent optimism over the Canadian economy, signalling in a speech Wednesday a more openended monetary outlook that could see interest rates move “in either direction” amid fears over rising household debt levels.

In comments to a local trade organization in St. John’s, Poloz said there was “no predetermined path” for interest rates in the second half of 2017 and beyond. He also said rising household debts in Canada leave the economy exposed to anything from higher housing prices to an uptick in unemployment levels.

“The Canadian economy is not well prepared for a negative shock to the economy,” Poloz said.

The governor laid out several factors that are likely to influence future rate decisions, including oil prices movements, an overheated housing market and a higher Canadian dollar. The loonie fell 0.33 cents to US80.57 cents on the governor’s dovish comments.

He said further interest rate hikes will be increasingly data-driven rather than based on economic modelling, saying the bank would “not be mechanical in our approach to monetary policy.”

His comments come amid an increasingly challenging environment for central bankers, who have generally struggled in recent years to meet inflationary targets while navigating a surge in political nationalism and geopolitical uncertainty.

The Bank of Canada has raised its overnight rate twice in recent months, effectively reversing its decision in 2015 to cut back rates amid a slump in oil prices.

High economic growth in the past two quarters has put Canada among the fastestgrowing economies in the developed world, prompting the rate hikes. But market observers say the outlook is not as rosy as recent data might suggest, particularly as developed economies are expected to see slower growth for the foreseeable future.

The central bank will need to approach its monetary policy with an increasingly deft hand, a point that Poloz focused heavily on in his address Wednesday.

“The Bank of Canada will have to be particularly gentle,” said Nick Exarhos, an analyst with CIBC Capital Markets based in Toronto.

Interest rate hikes today, due to higher levels of household indebtedness, have roughly 1.5 times the impact that they had around the early 2000s, he said.

“Each consecutive interest rate hike packs a bigger punch.”