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Stephen Poloz’s guidance for a rate change suggests there will be no movement for well over a year. (CHRIS WATTIE/REUTERS)
Stephen Poloz’s guidance for a rate change suggests there will be no movement for well over a year. (CHRIS WATTIE/REUTERS)

ECONOMY

Poloz spells out ground rules for rate hike Add to ...

Stephen Poloz has spelled out what he expects to see from the economy before the Bank of Canada hikes interest rates, and the timeline appears to be a long one.

The new central bank governor sees holding the benchmark overnight rate at its current low level as long as there is significant excess capacity in the economy, the outlook for inflation remains muted, and households continue to get a better handle on their personal debts.

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“They won’t all move in a straight line, they won’t all move at the same time,” Mr. Poloz told reporters Wednesday after the central bank held the key rate at 1 per cent, where it has stood since September, 2010, and released its first monetary policy report since the new governor joined last month.

“We are trying to explain ... what the natural process of getting home will be like,” he added.

By “getting home,” Mr. Poloz was referring to the beginning of a return to higher, and more traditional, levels of interest rates.

The bank also lowered its outlook for the global economy, a sober reminder that economic growth in Canada and abroad remains sluggish by historical standards, and prospects for a return to normal conditions cloudy at best, four years after the end of the recession. Observers see the benchmark rate holding steady until late next year or sometime in the first half of 2015 if inflation rises to the midpoint of its target range of 1 per cent to 2 per cent according to its forecasts.

“Add it all up and we have a central bank that’s appropriately in no hurry to move off a very stimulative 1 per cent interest rate target,” said chief economist Avery Shenfeld of Canadian Imperial Bank of Commerce.

As for when Mr. Poloz expects interest rates to rise, he replied: “The honest answer is we really don’t know,” adding it would depend on when several economic indicators return to “normalization.”

The central bank under Mr. Poloz did not change its policy, and altered its outlook only slightly, while economists welcomed the clarity from the former chief executive officer of Export Development Canada, who took over as governor as Mark Carney left for the Bank of England.

Hanging over the forecast is a lot of uncertainty. The central bank said the recent Alberta flood and Quebec construction strike would have a “choppy” effect in that it likely depressed second-quarter economic output and created a surge in the current July-to-September period as the two provinces work through the disruptions.

The central bank expects overall economic growth of 1.8 per cent in Canada this year, followed by a 2.7-per-cent rise in each of the 2014 and 2015, largely from a recovering U.S. economy and strengthening business confidence.

Global uncertainty presents “a somewhat more challenging external environment ... than previously anticipated," the central bank said as it trimmed its forecasts for the U.S., European, Chinese and global economies as a whole, blaming a declining rate of growth in China and other emerging economies, which has weighed on commodity prices.

New Bank of Canada Governor Stephen Poloz has spelled out what he expects to see from the economy before the central bank would consider raising its overnight lending rate from 1 per cent, where it has stood since September 2010.

Economists welcomed the clarity from the former CEO of Export Development Canada that the bank’s current loose monetary policy stance would hold as long as there is significant excess capacity in the Canadian economy, the inflation outlook remains muted, and “imbalances in the household sector continue to evolve constructively.”

“They won’t all move in a straight line, they won’t all move at the same time, “ Mr. Poloz told reporters in Ottawa of the three factors. “We are trying to explain...what the natural process of getting home will look like” toward a period of tightermonetary policy.

That suggests a rate hike could happen late next year or by mid-2015, if inflation rise to the midpoint of the bank’s 1 per cent to 3 per cent target range as the it now foresees. “Add it all up and we have a central bank that’s appropriately in no hurry to move off a very stimulative 1 per cent interest rate target,” CIBC chief economist Avery Shenfeld said in a note.

Hanging over the forecast is a lot of uncertainty. The central bank said the recent Alberta flood and Quebec construction strike would have a “choppy” effect, depressing second quarter economic output and creating a surge in the following July-to-September period as the two provinces work through the disruptions.

A larger factor is the central bank’s darkening outlook on the global economy, which presents “a somewhat more challenging external environment...than previously anticipated," it said. The bank trimmed forecasts from April for the U.S., European, Chinese and global economies as a whole, blaming a declining rate of growth in China and other emerging economies, which has weighed on commodity prices.

The one bright spot is Japan, which has made more aggressive monetary and fiscal policy moves of late. Even then, Japan faces long-term structural issues, including an aging population and high debt, and is only expected to generate 1.9-per-cent growth this year and below that level in 2014 and 2015.

In addition, the bank cautioned several factors could change its assumptions, including a stronger-than-expected increase in U.S. private demand that could drive up inflation here; a worsening European crisis or further declines in listing emerging markets that could hurt the Canadian economy; and a more "disorderly" deterioration in the Canadian housing market than the soft landing many now foresee. For now, the bank says the housing market is in a period of "constructive evolution" as Canadians save more and invest a declining share of overall economic output in housing than they have in recent years.

The latest forecast is a sober reminder that growth in Canada and abroad remains sluggish by historical standards, and the prospects for a return to normal economic growth are cloudy at best, four years after the Great Recession ended. Mr. Poloz compared the task of forecasters to that of ancient mariners accustomed to guiding their way by the night sky of the northern hemisphere trying to get their bearings after crossing the equator. “We aren’t quite at sea, but we are in a territory where the questions are more numerous.”

As for when Mr. Poloz expects interest rates to rise, he replied: “The honest answer is we really don’t know,” adding it would depend on when several economic indicators return to “normalization.”

Despite this year’s choppy results, the bank expects overall economic growth of 1.8 per cent in Canada followed by a 2.7 per cent rise in each of the 2014 and 2015 largely from a recovering U.S. economy and strengthening business confidence.

Economists had been closely watching Mr. Poloz's debut monetary policy report for signs of change from Mr. Carney. They saw none other than subtle shifts in language and clarity. Mr. Poloz “is a bit more dovish, and we take it to mean that the bank is less rigid in its reviewing of monetary policy to get back to more ‘normal’ times,” said IHS Global Insight economist Arlene Kish.

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