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Poloz signals delay in interest rate increase as economy struggles

Bank of Canada Governor Stephen Poloz holds a new conference at the National Press Theatre in Ottawa on Wednesday, April 13, 2016.


Bank of Canada Governor Stephen Poloz is warning that a move to raise interest rates will likely be delayed again as the Canadian economy struggles to gain traction in a slow-growth world.

Mr. Poloz acknowledged on Tuesday that the central bank's current projection that the economy will get back to full capacity near the end of 2017 may be too optimistic.

"It is quite evident that our economy is still facing strong headwinds, and we need stimulative monetary policy to counteract them," Mr. Poloz said in a speech to a group of economists in Quebec City.

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Mr. Poloz's speech was sprinkled with advice for families, investors and businesses about the consequences of a world of low interest rates and slow growth. He said Canadians will have to work longer and save more, while companies must get used to generating significantly lower returns on their investments, he said.

"This is about much more than monetary policy," he said. "There are big, long-term, global forces acting on interests, and people need to understand them."

The comments bolster the expectation that the Bank of Canada will not start pushing up its key interest rate until at least mid-2018. Some economists say a rate cut remains on the table if economic conditions deteriorate significantly. After cutting rates twice last year, the bank's key rate has been set at 0.5 per cent since July, 2015.

"Rate hikes are clearly not on the horizon," National Bank of Canada economist Krishen Rangasamy said in a research note.

Opinion: We've painted central bankers into a corner on interest rates

Read more: The Poloz puzzle: Policy lauded, but message muddled

Bank of Montreal economist Benjamin Reitzes said "patience" has become the central bank's guiding principle in an environment where near record-low interest rates are having minimal impact on growth.

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The central bank is due to release its next quarterly forecast on Oct. 19, at which time it will revise its official estimate of when the economy will return to full capacity – a key precondition for raising rates.

Mr. Poloz said the antidote to slow growth is more infrastructure spending and open borders – both within Canada and internationally – through deals such as the Trans Pacific Partnership (TPP) and the Canada-Europe free-trade agreement.

"In a low-growth world, these … initiatives taken together could have a significant impact on economic growth, year after year," he said. "These are opportunities we simply cannot afford to miss."

Based on what he called a "reasonable estimate," Mr. Poloz said the combination of freer trade and more infrastructure spending could boost Canada's gross domestic product by 3 per cent to 5 per cent a year over the next decade. That is the equivalent of $100-billion a year in extra income for Canadians.

Both the TPP and the free-trade deal with Europe are bogged down in the ratification process and could take years to come to fruition. The agreement with Europe, for example, must be ratified by the 28 European Union member states. Ratification of the 12-country TPP is facing similar delays, most notably in the United States, where the two main U.S. presidential candidates – Democrat Hillary Clinton and Republican Donald Trump – say they are opposed to the deal.

"We all need to encourage [trade liberalization], both within Canada and internationally, since the world seems to be entering a phase of doubt about the benefits of international trade," Mr. Poloz said. "We know from history that sliding into protectionism would be highly counterproductive."

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He also said that governments in Canada need to make sure that tax and immigration policies are not holding back business growth, particularly for "new and young firms."

Mr. Poloz also warned that individual Canadians and businesses need to gird themselves for interest rates that are likely to stay "lower for longer."

"We cannot just sit back and wait for these slow-moving forces to reverse," he argued. "People and companies, investors and savers, all need to understand these forces and make adjustments."

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More


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