Canadian Manufacturing

‘No predetermined path for interest rates’ says BoC’s Poloz

Bank of Canada governor Stephen Poloz Poloz said several "unusual" unknowns now complicate future rate moves, citing elevated levels of household debt, downward pressure of technological breakthroughs on inflation and slower-than-expected wage growth


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OTTAWA—There is no prearranged route for further interest-rate hikes from the Bank of Canada, governor Stephen Poloz insisted as he signalled the bank would be taking a more cautious approach to any future increases.

The central bank raised rates twice over the summer following the economy’s surprisingly powerful start to the year.

Moving forward, however, Poloz said bank officials will carefully assess a long list of lingering unknowns and external risks to their outlook. The goal is to update their understanding of the economy “in real time,” he said.

“There is no predetermined path for interest rates from here,” Poloz said in a speech to the local board of trade in St. John’s.

“Although we are confident that the economy has made significant progress, we simply can’t be certain of exactly how far there is left to go.”

Poloz’s speech comes after the sizzling Canadian economy spurred the bank to raise the rate twice—first in July and then again earlier this month.

Poloz shared several “unusual” unknowns now under close watch by the bank as it considers future moves. They include elevated levels of household debt, downward pressure of technological breakthroughs on inflation and slower-than-expected wage growth.

He also noted how the period since the financial crisis has brought in a protracted period of slow economic growth and extremely low interest rates.

“The fact is, nobody really knows,” Poloz said in response to a question about where rates could go from here.

“We’re in uncharted territory.”

In his address, Poloz warned that more surprises could lie ahead—in “either direction.”

The speech pointed out that the bank’s decisions have become “particularly” data-dependent due to uncertainties such as geopolitical developments and protectionist sentiments in some parts of the world.

He also offered details about the bank’s decision to raise the rate a second time following a run of unexpectedly strong economic numbers.

Poloz noted, however, that he doesn’t expect the economy to maintain the torrid pace it set in the first half of 2017.

The speech marked the first public comments by Poloz since the bank drew criticism for its communications approach ahead of the September hike, which caught many forecasters off guard.

Some analysts took issue with the fact the bank did not provide any public remarks for them to scrutinize for hints during the eight-week period between the July and September rate decisions.

A few days after the second hike, the bank publicly defended its communications strategy, saying about half the market had priced it in.

“I think we’ve spilled enough ink on that earlier issue already,” Poloz said in response to a question on the bank’s messaging style.

“And I’d just point out that an awful lot of people were not surprised by that interest-rate decision—how’d that happen?”

Communications, and thinking about new ways to go about them, are always the subject of an “active discussion” at the bank, he added.

The bank’s next scheduled rate announcement is scheduled for Oct. 25.

Before his speech, most analysts had been expecting the central bank to raise the benchmark rate a few more times over the coming year.

Poloz’s message led some to reconsider their projections on the timing of the bank’s next rate move.

“It seems like these are really going to be last-minute decisions,” said Desjardins senior economist Jimmy Jean, who had been expecting the bank to hike rates again at next month’s meeting.

Jean now expects a lot of uncertainty and volatility in the marketplace ahead of rate decisions unless there’s more direction from the bank about the approach it plans to take.

Benjamin Reitzes, a strategist with BMO Capital Markets, wrote in a research note to clients that the speech showed Poloz is in no hurry to raise the rate.

“The (Bank of Canada’s) bias is, of course, to push rates higher, but the data will determine how quickly they move.”


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