Bank of Canada Governor Stephen Poloz said the economy has “lots of room to grow,” suggesting a spate of stronger data points won’t sway the central bank from its plan to leave interest rates unchanged at least until well into next year.
Mr. Poloz made the comments in an interview Friday, after Statistics Canada reported milder inflation and stronger-than- expected retail sales. At the same time, the vast majority of jobs created this year in Canada are part-time positions, a phenomenon that Mr. Poloz said is a “symptom of slack” in the labour market. That argues in favour of maintaining a policy of low borrowing costs, as the economy is a long way from putting pressure on inflation.
“If the economy took off like a rocket, it would still have room to grow and the way things have been, there is a lot of room to grow,” Mr. Poloz told The Globe and Mail at the Kansas City Fed’s annual economics symposium in the shadow of Wyoming’s Grand Teton mountains.
The remarks are the central bank governor’s first since the Bank of Canada released its latest economic update a month ago. At the time, policy makers were apprehensive about the United States, concluding that the world’s largest economy had lost some momentum during a tough winter.
The Bank of Canada also took pains to explain why it was leaving interest rates low even though inflation had breached its 2-per-cent target, using the policy report to predict the price increases were transitory. It suggested it could be two years before Canada’s economy is growing fast enough to stoke inflation.
Mr. Poloz makes a habit of avoiding comment on specific indicators. He did grant that the data he has observed over the past month “feels roughly right,” in that it aligns with the economic trajectory the central bank foresaw at the time. “We’ve had some trade data that were okay, the inflation data from today sort of fit the story,” he said.
On Friday, StatsCan said the Consumer Price Index was 2.1 per cent higher in July than a month earlier, slower than June’s annual inflation rate of 2.3 per cent. Prices for automobiles, gasoline and clothes all declined markedly last month.
All things equal, slower inflation will take the pressure off the Bank of Canada to raise interest rates – something Mr. Poloz has made clear he has little interest in doing any time soon. Canada’s economy has fallen into a rut, as exporters struggle to boost sales and businesses prove reluctant to invest. Canadian employers have created few full-time jobs this year.
Perhaps the most important development since the Bank of Canada’s last economic checkup is a steady string of stronger-than-expected indicators showing the U.S. economy rebounded sharply from a contraction at the start of the year. Mr. Poloz has made clear that an export revival must lead Canada out of its current economic doldrums and the U.S. is by far Canada’s largest trading partner.
Unusually snowy and frigid weather shocked the U.S. in the first quarter. Yet the Commerce Department now says the contraction wasn’t as severe as first thought. More important, Commerce’s initial estimate of gross domestic product in the second quarter put growth at an annual rate of 4 per cent, which would more than reverse the 2.1-per-cent contraction in the first three months of the year.
On the surface, Mr. Poloz said the rebound suggests the U.S. economy more than made up ground. However, he said the Bank of Canada’s analysis would be more thorough than comparing the headline number from the first quarter with that of the second. “Those two numbers are not enough,” he said. The governing council will assess the strength of the U.S. economy by digging in to get a better understanding of the housing market, trade and whether bigger inventories reflect demand or seasonal factors.
The Bank of Canada is relying on exports and business investment to lift economic growth because it assumes consumers essentially are tapped out. Canada’s households have been spending at a strong rate for years, racking up an uncomfortable level of debt in the process.
There still is life in consumer demand, however. StatsCan also reported Friday that retail sales rose 1.1 per cent in June, a strong gain that was bigger than most Bay Street analysts were expected and better than the previous month’s 0.9 per cent increase.