REPEAT: BOC's Poloz Repeats To Be Cautious; 'Uncertainties'

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

market.

     "Productivity in Canada is growing sufficiently strongly now in aggregate,

somewhere around 3%," Poloz told lawmakers, and even more than 4% in the goods

sector.

     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

shocks.

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