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Bank of Canada governor says rate cut not considered amid strong data

Thursday, April 13, 2017 - 06:34

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The Bank of Canada did not even consider cutting interest rates as it left monetary policy unchanged on Wednesday amid signs of strong growth, but it is too early to conclude the economic growth is sustainable, Governor Stephen Poloz said.

[OTTAWA] The Bank of Canada did not even consider cutting interest rates as it left monetary policy unchanged on Wednesday amid signs of strong growth, but it is too early to conclude the economic growth is sustainable, Governor Stephen Poloz said.

Sounding less dovish than in January, when he said policymakers discussed a possible rate cut, Mr Poloz said the bank was "decidedly neutral" even as it raised its growth forecast for 2017. "Given the data that we've seen in the last few months, I can quite clearly say no, a rate cut was not on the table at this time," Mr Poloz told a news conference.

Reiterating its position that material excess capacity remains in the economy, the central bank nudged up its growth forecast for 2017 but lowered its projection for potential growth to reflect "persistently weak investment." Taken together, the outlooks mean the bank now projects the output gap to close in the first half of 2018, sooner than the mid-2018 date predicted in January.

In a report that noted a weakness for every strength, the bank said business investment remains well below what could be expected at this stage in the recovery and wage growth remains subdued, while residential investment has been stronger than expected. "This is Bank of Canada telling you that they are not going to touch interest rates anytime soon," said Benjamin Tal, senior economist at CIBC Capital Markets.

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In later testimony to a parliamentary committee, Mr Poloz said it would be wrong for the bank to try to offset market factors driving the Canadian dollar, but acknowledged that a weaker currency is "selectively good" for some sectors, making exports more competitive but increasing input costs.

The US dollar sank on Wednesday after US President Donald Trump said the greenback was "getting too strong" and he would prefer the Federal Reserve keep interest rates low.

Mr Poloz said speculative forces are at work in Toronto's hot housing market, noting that prices, which rose 33 per cent in March from a year earlier, are divorced from fundamentals.

Senior Deputy Governor Carolyn Wilkins emphasised that while the bank sets policy independently of the Fed, which has begun hiking rates, higher US rates will have an impact. "As the Federal Reserve starts to tighten interest rates, we're going to quite naturally import some of that rise and in fact we have seen that," Ms Wilkins told the committee.

REUTERS

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