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monetary policy

File photo of Bank of Canada Governor Stephen Poloz.Adrian Wyld/The Canadian Press

Bank of Canada Governor Stephen Poloz used a speech in Montreal to set the record straight: He is not as dovish as many have thought; nor does he talk the dollar down to boost exports and listless inflation.

The Canadian economy is jeopardized both by an overheated housing market and by dormant price increases. "Right now, it looks to us like it will take around two years to get inflation back to 2 per cent," Mr. Poloz said in front of the Canadian Club.

Canada's annual inflation rate has slumped to 0.7 per cent, well below the central bank's 1- to 3-per-cent target range. That has raised the risk of deflation, a downward spiral in prices that lead people to put off purchases as they expect prices to fall further, which dents economic growth.

But recent data have reassured the Bank of Canada Governor. "Both of those risks are diminishing as we speak," he said in the press conference after his speech. Mr. Poloz expects a soft landing in the housing market, which will be offset by a pickup in exports and business investments.

Managing those two threats, however, is a balancing act Mr. Poloz describes as an "exercise in risk management." A week ago, the Bank of Canada kept its key interest rate on hold for the foreseeable future, saying non-commodity exports have disappointed, while business investment is recovering "more slowly than anticipated."

Since Mr. Poloz succeeded Mark Carney, the Bank of Canada has dropped its tightening bias. But the central banker sought to dispel the idea he was more dovish and ready to cut rates to stoke inflation. "It is more a movement towards honesty than dovishness," Mr. Poloz explained.

"All we are really doing is being honest and saying that at this stage, rates will stay where they are for quite some time."

Asked on three occasions about his views on the Canadian dollar, which has fallen 10 per cent in the past 15 months, the former head of Export Development Canada also refrained from kicking the currency while it is down. "Our focus is on inflation," he said, later adding that "the markets will grind out the exchange rate as they see fit."

The Canadian dollar dropped .42 of a cent, reaching 93.98 in late trading Thursday.

Mr. Poloz nonetheless indicated that the loonie's correction vis à vis the greenback was to be expected insofar as the Federal Reserve is about to curb some of the extraordinary stimulus measures the United States took in the wake of the financial crisis.

The U.S. is showing signs of revival, but that has yet to be felt in Canada, where exports remain soft. "We expect that, with the stronger U.S. economy, the [output] gap will close in the next two years," Mr. Poloz said.

The sluggish economy that has kept interest rates low in Canada have raised fears that household indebtedness would continue to spiral up. But he is reassured by recent data that indicate that household borrowing has abated and residential investment is "on a more sustainable track."

While both indicators have picked up again lately, he believes that's temporary, and expects these imbalances to "stabilize and then gradually unwind" in the coming years. Still, "there is a risk that household imbalances could keep building and set the stage for a sharp correction down the road," he said, adding that this type of correction would pose a threat to both the domestic economy and its financial system.

The Bank of Canada Governor has been said to prefer persuasion, and to talk more than he acts, but when a reporter brought this to his attention, Mr. Poloz used a metaphor in the spirit of the nautical references that were peppered in his speech. "It's like a duck on a calm lake," he said in French. "On the surface, he looks like he is idle, but under the water, his feet are really busy."