Bank of Canada Governor Stephen Poloz has set a high bar for cutting interest rates again.
It would take a "shock of some significance" – such as another economic setback in the United States or China – for the central bank to consider more rate relief, Mr. Poloz said Tuesday.
The bank cut its overnight rate twice last year after the global commodities price crash, which has decimated jobs and investment in Canada's oil patch. But the rate has been fixed at 0.5 per cent since last July in spite of further deterioration in both the Canadian and global economies.
The new Liberal government's move in its March budget to invest $25-billion in infrastructure and families over two years "more than offset" the renewed downward pressure on the economy, according to Mr. Poloz. In its April monetary policy report, the bank estimated that federal stimulus would boost gross domestic product by 0.5 percentage points this year and 0.6 points in 2017.
Canada's top central banker said it would take a major delay in getting the economy back to full capacity for the bank to revert to an easing bias on rates. Those shocks could include a major slowdown in the global economy brought on by weaker growth in China or the U.S., Canada's largest trading partner.
"It would be another negative shock but it would need to be obviously a shock which is of some significance or an accumulation of other shocks," Mr. Poloz told reporters after a speech to Wall Street financial professionals in New York.
He was quick to point out that either of these scenarios are built into the bank's current forecast. "Those are just shocks that economists think about," he explained.
Mr. Poloz said he expects the Canadian economy to get up to "full speed this year." But he cautioned that it will take another full year or more for the economy to absorb any "excess capacity," including laid-off workers and idled plant production.
Canada is "fortunate" that the federal government is spending money on fiscal stimulus because it balances out the waning impact of monetary policy, he pointed out.
Mr. Poloz dedicated most of his speech to explaining a troubling drop-off in global trade growth since the 2008-09 financial crisis.
He warned that trade growth around the world is unlikely to regain the torrid pace of the years before the global financial crisis. The days of 7-per-cent annual growth in international trade are gone, perhaps for good, Mr. Poloz said.
"The rapid pace of trade growth that prevailed in the two decades before the crisis was the exception, and not the rule," Mr. Poloz argued.
That's because much of the slowdown is due to the end of a long period of global integration – as multinationals specialized and built global supply chains, countries formed powerful new trading blocs and China joined the global economy.
"The big opportunities for increased international integration have been largely exploited," Mr. Poloz explained. "China can join the [World Trade Organization] only once."
Mr. Poloz nonetheless put a positive spin on the outlook for trade. Roughly half the post-crisis slowdown in trade is due to cyclical economic weakness, particularly lower business investment, most of which will be reversed.
"The weakness in trade we've seen is not a warning of an impending recession," he said. "Rather, I see it as a sign that trade has reached a new balance point in the global economy, and one that we have the ability to nudge forward."
Some analysts said his comments suggest Mr. Poloz remains a trade optimist. He could have said Canadian exports will remain volatile, Bank of Nova Scotia economists Derek Holt and Dov Zigler said in a research note. "Instead, [he] walked on the sunnier side of the street."
Countries can bolster trade by striking new free-trade agreements, such as the Trans-Pacific Partnership, and boosting productivity, according to Mr. Poloz. Other sources of trade growth will come from the emergence of new, more productive companies – a process that has already begun, he added.