BOC's Poloz:Risks, Uncertainties Will Keep BOC MonPol Cautious

By Courtney Tower

     OTTAWA (MNI) - The Bank of Canada sees the country's economy as being in a

"sweet spot" right now with the output gap closed, but also with sour tastes

hovering in the form of uncertainties over the labor market, household debt,

NAFTA and U.S. policies, Governor Stephen Poloz said Wednesday.

In essentially a repeat performance of what he told a House of Commons committee

Tuesday, Poloz outlined for the Senate Banking, Trade and Commerce Committee an

economy growing at an estimated 3.1% this year that would drop to 2.1% in 2018.

This latter still would be faster than the growth of the country's economic

potential, he said.

The uncertainties include what is restraining the path of inflation in Canada

and many countries, how and when the labor market will win back discouraged

workers and youth, the continuing softness in wage growth, and record high

household debt, Poloz explained.

As a result of these and other risks, including future U.S. trade policy, he

said "we will be cautious about making future adjustments to our (1.0%) policy

rate."

His essential message to senators was that the Bank will wait  and see what

transpires on several fronts before making any change to the policy rate on

December 6 or thereafter in 2018.

For instance, the BOC would make no adjustment to the policy rate on

anticipation either of what the outcome of difficult NAFTA negotiations may be

or should Canadian firms become less competitive if President Trump's tax cuts

for business in the United States occur.

The "sweet spot," as he called it, of the economy having reached or nearly

reached full potential in a year thus far of strong growth, nevertheless had the

uncertainty before it of labor market performance and softness in wage growth,

Poloz said. He wants to see the labor slack improved, thus bringing on higher

business investment in plant and equipment.

     Poloz added it is hard to know how much labor market slack remains, and

said he wanted to see whether softness in wage growth was due only to Canadian

conditions or is part of a global trend that Canadian policy cannot affect.

At the moment, Canada is behind the United States, perhaps by two years, in

convergence of closed output gap and labor market slack removal, he said.

In other comments, the Governor said about one-third of the growth path of the

economy is due to immigration.

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

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