BOC's Poloz: MonPol To Move Cautiously Due So Many Unknowns>

--Policy Decisions Particularly Data-Driven 

By Courtney Tower

     OTTAWA (MNI) - The Bank of Canada has become "particularly data 

dependent" in its policy interest rate decisions and will cautiously 

because Canada's inflation outlook is so uncertain, Governor Stephen 

Poloz said Wednesday. 

     This is a time  of such domestic and foreign-based risks to the 

economy, with so many unknowns clouding the outlook for inflation, that 

the central bank must "feel our way cautiously as we get closer to home 

(the economy working at full capacity)," he said in prepared remarks to 

St. John's Board of Trade in Newfoundland. 

     Poloz, meeting criticism by some financial market analysts that the 

Bank gives insufficient forward guidance to its decisions, said that 

"there is no predetermined path for interest rates from here." 

     "Monetary policy will be particularly data dependent in these 

circumstances and, as always, we could still be surprised in either 

direction," he said. 

     For the present, Poloz said that after a surge in economic growth 

in the first half of this year and with economic growth becoming more 

broadly-based and self-sustaining, "recent data point clearly to a 

moderation in the second half." 

     The two interest rate declines to 0.50% in 2015 have been 

successful and "at a minimum, that additional stimulus is no longer 

needed," he said. Hence, the two rate increases in July and September, 

to 1.00%. 

     Poloz cited four special issues to which the BOC is paying 

attention, of which "the first and most important is the evolution of 

economic capacity." 

     Full capacity does not stay fixed, he noted. As private companies 

increase investment, they raise their productivity and/or increase their 

workforce, so that investment spending increases economic capacity, he 

said. 

     "The protracted (economic) cycle we have been through makes this 

issue particularly relevant this time around," he said. 

     On the inflation front, the growing digital economy may be allowing 

goods and services to be produced and delivered more efficiently, 

helping keep prices down, as a second unresolved issue, he said. 

     Still, he pointed out that core measures of inflation have edged 

higher since July, "as expected." Going forward, "The temporary factors 

that have been holding inflation down should dissipate in the months 

ahead, although recent exchange rate developments could affect this 

timing." 

     A third important factor is the slower-than-expected wage growth 

than one would expect in an economy approaching full output, possibly in 

part due to employment shifting out of higher-paying oil sector jobs. 

The Bank must try to understand "the underlying shifts in behaviour" 

that this data may be pointing to, Poloz said. 

     And a fourth was "elevated household debt." 

     "The Bank will be looking closely to see how the economy's 

adjustment to changes in interest rates may differ from that in previous 

economic cycles," he said. 

     Other risks include "geopolitical developments and the rise of 

protectionist sentiment in some parts of the world," Poloz said. 

     In sum, Poloz said that, "although we are confident that the 

economy has made significant progress, we cannot be certain of exactly 

how far there is left to go." 

                                ** MNI OTTAWA ** 

[TOPICS: M$C$$$,MACDS$]