The unwinding of massive U.S. monetary stimulus could do what the Bank of Canada is reluctant to do itself – raise interest rates at home.
Bank of Canada Governor Stephen Poloz said Tuesday that Canadian long-term interest rates could rise this summer as the U.S. Federal Reserve continues to scale back its program of buying $85-billion (U.S.) of bonds a month, and that could be good for Canada.
The removal of all that stimulus will likely force up bond yields, both in the U.S. and in Canada, Mr. Poloz said in an interview with CBC television, slated to be aired Tuesday evening.
"Those kinds of pressures are the positive ones – if the U.S. economy strengthens as we believe, those are very welcome market pressures," Mr. Poloz said, according to an account of the interview posted on the CBC website.
Mr. Poloz explained that a long-term rate rise wouldn't greatly hurt the Canadian economy as the housing market appears to be heading for a soft landing and consumer spending, which has kept the economy strong these past few years, must come down to bring down household debt levels.
Mr. Poloz insisted that the central bank plans to keep its own key overnight interest rate where it is – at 1 per cent – until data on the unemployment rate, consumer spending and the inflation rate suggest a move is warranted.
"In the context of a firming global economy, especially the U.S., we'd expect to see some upward pressure in market interest rates, long-term rates in particular, where the quantitative easing has its primary effect," Mr. Poloz said.
"So as a tapering occurs, we might expect to see, as we saw in the summer, some increases in long-term rates," he added.
It's the second time this week that a senior Canadian official has talked of higher rates coming in Canada – a possible cautionary warning to homeowners, potential buyers and the real estate industry about the risk of higher mortgage rates.
On Sunday, Finance Minister Jim Flaherty told CTV that Canada would face growing international pressure to raise interest rates in 2014 – comments that sparked outrage from the opposition NDP about political meddling in monetary policy.
But so far there's been no sign that the Bank of Canada would push up its own key interest rate. Quite the opposite. In October, Mr. Poloz jettisoned a Mark Carney-era pledge to begin ratcheting up ultra-low interest rates, which had been a fixture of the central bank's policy statements dating back to early 2012, in favour of a neutral stance. Economists now say a central bank rate hike in Canada is unlikely until at least 2015.
Mr. Poloz said he's not worried about international calls for Canadian rates to rise sooner, as Canada's Finance Minister Jim Flaherty suggested on Sunday.
"We should be holding rates where they are until the data flow changes our mind," he said.
Inflation, which is running well below the Bank of Canada's 2-per-cent target, continues to be Mr. Poloz's main preoccupation.
"I would say I'm most worried about inflation and how it's underperforming. It's a difficult one to explain right now," he said. "That always makes you worry."
Mr. Poloz also told the CBC that the signs for the U.S. and Canadian economy in 2014 seem positive, but there are still many "question marks" in his outlook, including why exports are not rebounding as quickly as expected.
Canada posted a 23rd consecutive monthly trade deficit in November in the face of stagnant exports, Statistics Canada reported Tuesday.