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Clears Key Support And Resumes Its Major Downtrend


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Repeats Story Initially Transmitted at 21:53 GMT Oct 31/17:53 EST Oct 31
By Yali N'Diaye
     OTTAWA (MNI) - Bank of Canada Governor Stephen Poloz repeated Tuesday the
central bank will be "cautious" going forward in light of "significant
uncertainties" that cloud the outlook.
     Poloz reiterated in an appearance before the House finance committee that
soft inflation, the degree of excess capacity in the economy, high household
debt and soft wage growth were four key sources of uncertainty.
     "We are at a crucial spot in the economic cycle, and significant
uncertainties are clouding the way forward," he said in prepared remarks.
     He also cited uncertainty related to U.S. trade policy, which "is having
some impact on business confidence and investment spending, and this impact is
reflected in our outlook."
     That being said, Poloz reaffirmed that monetary policy remains on a
tightening path, and indicated in questions and answers with lawmakers that wage
growth could pick up in the near term as excess is being absorbed in the labor
     "Productivity in Canada is growing sufficiently strongly now in aggregate,
somewhere around 3%," Poloz told lawmakers, and even more than 4% in the goods
     Such "unusual" readings suggest the pickup is "mostly cyclical" and should
"slow down to something more normal in the near term," although that remains to
be seen.
     Overall, higher productivity trends reflect the transition of the economy
away from the oil sector and towards other high productivity sectors, he said.
     "That's something that will continue provided that those two growth tracks
remain in place," Poloz continued, also pointing out that currently, unit labor
costs in Canada are falling as productivity is outpacing wages.
     So in the near term, he expects that as excess is being absorbed in the
labor market, "wage growth is going to pick up because companies can afford it."
     For now, however, the "cautious" approach remains, and the BOC "will be
guided by incoming data to assess the sensitivity of the economy to interest
rates, the evolution of economic capacity, and the dynamics of both wage growth
and inflation," he said, reiterating the October 25 policy statement.
     In particular, given the elevated household debt, the central bank will
monitor how households respond to tighter mortgage underwriting standards,
acknowledging high debt is a "challenge" for adjusting interest rates.
     That being said, he added he was "confident" the Canadian financial system
was not itself a source of risk despite the vulnerability caused by high
household debt.
     Poloz declined to tell lawmakers the degree of monetary tightening
households could absorb, stressing it is not automatic.
     Nor did he provide an indication on the maximum degree of divergence that
could exists with the Federal Reserve policy, arguing it depends on underlying
--MNI Ottawa Bureau; +1 613 869-0916; email:
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