BOC’s Poloz Hints Delay in a Rates Hike

Stephen Poloz, Bank of Canada Governor has urged the country’s policy makers to forge ahead with measures to ease trade restrictions and spend more on infrastructure as a means to raise the currently weak long term growth rates. In a statement delivered in the city of Quebec, he said an aging population and other factors have dragged down the country’s “potential” growth rate to about 1.5%, further raising the downward pressure mounted on interest rates that goes well beyond efforts by the central bank to stimulate the economy.

“Policy rates have generally remained extremely low, mainly because the economic headwinds that the crisis created have been slow to fade,” Poloz said. “This is about much more than monetary policy. There are big, long-term, global forces acting on interest rates, and people need to understand them better.”

The speech was mostly in conformity with the recent statements made by the BOC implying that the low growth rate is the direct result of the fundamental factors and they require a broader policy response than just monetary policy to counter. “Negative rates remain a tool the central bank can use if necessary, although nobody likes them,” Poloz said in response to an audience question.

The governor’s comments “today again suggested that low rates are likely to be reality for quite some time in Canada,” Nick Exarhos, an economist at CIBC World Markets in Toronto, wrote in a note to clients.

Mr. Poloz also acknowledged in his speech that the central bank’s current forecast that the economy will get back to full capacity near the end of 2017 may be too optimistic.

“It is quite evident that our economy is still facing strong headwinds, and we need stimulative monetary policy to counteract them and move us closer to full capacity,” Mr. Poloz said in remarks prepared for a speech to a group of economists in Quebec City.

The BOC have had their key rates at 0.5% since July 2015 and many economists do not expect the central bank to start raising the rate until mid-2018. The bank is scheduled to reveal its next quarterly forecast on October 19, it will also revise its official forecast of when the economy will return to full capacity, and this is a precondition for a rates hike.

Mr. Poloz also stated that the panacea to a slow-growth future is to raise spending on infrastructure and open borders – both within Canada and internationally – through deals such as the Trans Pacific Partnership (TPP) and the Canada-Europe free-trade agreement.

“In a low-growth world, these three initiatives taken together could have a significant impact on economic growth, year after year,” he said. “These are opportunities we simply cannot afford to miss.”

Based on what he called a “reasonable estimate,” Mr. Poloz said the combination of freer trade and more infrastructure spending could boost Canada’s gross domestic product by 3 to 5 per cent a year over the next decade. That’s the equivalent of $100-billion a year in extra income for Canadians.