BOC's Poloz: Getting To Neutral Target Rate Won't Be Rapid

By Courtney Tower

     OTTAWA (MNI) - Bank of Canada Governor Stephen Poloz said on Tuesday that

taking the steps from the present 1.75% policy interest rate to the neutral rate

target "will not be a rapid process."

     Poloz told the House of Commons' Finance Committee that getting to the

neutral rate, estimated between 2.5% and 3.0%, will require a two-sided balance

in the incoming data over time. He did not say how long that time would be.

     First, there are the conditions that the Canadian economy is strong,

performing at or near capacity and expected to continue to perform well, wage

growth is expected to rise from 2.3% to 3%-4%, employment is at a 40-year low,

business investment is expected to increase now that the U.S.-Mexico-Canada

preliminary agreement has been reached, both Poloz and Senior Deputy Governor

Carolyn Wilkins said.

     But to maintain that picture requires a balanced approach by the BOC, they

said. On the one side they did not want higher rates to stall economic growth.

On the other, with the 1.75% policy rate still very simulative to the economy,

there is the need not to let excess demand arise and create higher inflation

than the 2% target.

     So, getting to neutral would be for the BOC "a process of seeing the

effects" of incoming data, such as the effects of higher interest rates on

household debt, whether business investment picks up further, and the evolution

of the labor market, they said.

     Getting there, Poloz said "is not going to be a rapid process."

     Poloz and Wilkins during their testimony were mostly besieged by members of

Parliament concerned about the effects of BOC policy rate hikes and subsequent

commercial rate increases on their constituent households and businesses. There

have been five hikes of 25 basis points each since July of 2017 and, although

Poloz said the resulting 1.75% remains simulative, members reported concerns

about mortgage payments and stalling business expansions.

     Their argument was that, as Wilkins said, "this is the time to get back to

normal" after years of very low rates. Poloz said he hoped that the new BOC

emphasis on getting the policy rate up to neutral would be taken as a normal

transition. "We are going to be very careful about it," he said.

     With repeated mentions of the labor situation in Canada, the two top BOC

executives saw growth in that sector even though the jobless rate is

historically low. Poloz noted that "there are over 500,000 vacant jobs in

Canada" and yet there are still many Canadians looking for work. He saw chances

for innovative policies by government in that direction.

     For Canada, with its resources-heavy economy, Poloz saw difficulties due to

a slowing of Chinese economic growth and the effects of the United States-China

trade battles. This, he said, "greatly concerns me."

     Cyber security risks also "keep me awake at night," he said.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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