Bank of Canada Governor Stephen Poloz said he’s encouraged by strong business investment numbers despite all the uncertainty surrounding NAFTA talks.
Poloz said recent data suggests companies are “getting on” with the process of investing. Business spending has become a significant growth driver, and would be even higher were it not for the uncertainty around the North American Free Trade Agreement.
“Investment is lower than it otherwise would be, but it still is making a significant contribution to growth,” Poloz said in an interview with BNN Bloomberg Television on the sidelines of a Group of Seven meeting of finance ministers and central bank governors. “So it’s encouraging that underneath that we still have the usual forces acting in a positive way.”
As evidence, Poloz cited solid imports of machinery and equipment, “pretty good” sentiment indicators and a gross domestic product report Friday that showed non-residential investment was up an annualized 11 per cent in the first quarter.
“Actually, the latest ones this week were quite good,” Poloz said in the interview Friday from Whistler, British Columbia.
Poloz chaired a separate central banker-only meeting at the ski resort that focused on monetary policy under uncertainty. Asked about those discussions, Poloz explained two key sources of uncertainty that are particularly topical are questions around what is the potential for economies to grow without fuelling inflation, and what is the level of the real neutral rate to achieve that balance.
“Those two assumptions alone and their intersection give you all kinds of scope for uncertainty and ranges around things that you’re looking at,” Poloz said.
But since downside risks have become more important “given what we’ve been through,” it means the analysis skews toward waiting “a little bit longer before” inflationary pressures show up.
“That means that there’s probably more room to grow before inflation pressures are actually evident, but you don’t know that for sure,” Poloz said.
Another major issue for Poloz recently has been how record levels of household debt will impact Bank of Canada policy. On the one hand, the central bank is wary of raising interest rates too quickly on the assumption that the debt levels have made the economy more sensitive to interest rate increases. On the other hand, the Bank of Canada is aware that historically low interest rates only fuel borrowing and exacerbate financial system risks.
Poloz said that recent efforts by the government to rein in risky borrowing seems to be working.
“It was about improving the quality of indebtedness to make it more sustainable and by all counts that’s looking like that that it’s moving in the right direction.
– With assistance from Amanda Lang.