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BOC's Poloz: As global economy heals, interest rates will rise

 BOC's Poloz: As global economy heals, interest rates will rise - Micah verceles
BOC's Poloz: As global economy heals, interest rates will rise

Bank of Canada Governor Stephen Poloz used his first public comments to reiterate Mark Carney’s view that the central bank’s policy rate will rise as the economy grows and declined to give “running commentary” on whether the nation’s currency is overvalued.

“As the world heals, interest rates will rise,” Poloz, 57, said during testimony to the House of Commons Finance Committee in Ottawa today, his first remarks since starting the job June 3. “It will be consistent with our inflation target, which is to get inflation back up to 2 percent.”

The benchmark interest rate has been held at 1 percent since September 2010. The bank’s bias contrasts with U.S. and Japanese central bank measures of buying assets to rekindle growth. Most of Poloz’s testimony affirmed Carney’s policies of a flexible 2 percent inflation target in an expansion led by business spending as indebted consumers pull back.

“A few days into the job, Governor Poloz was careful not to send the Bank of Canada off in a wildly different direction,” Avery Shenfeld, chief economist at CIBC World Markets, said by phone from Toronto. Poloz didn’t “pound the table on the Canadian dollar being too strong,” as some investors expected, and “he has left some room for some subtle changes” later, Shenfeld said.

Loonie Strength

The Canadian dollar strengthened the most in almost a year against the U.S. dollar, which dropped against a majority of its major counterparts as traders unwound bets on a weakening yen. Canada’s currency, nicknamed the loonie, rose 0.9 percent to C$1.0256 per U.S. dollar at 2:06 p.m. in Toronto after strengthening as much as 1.4 percent, the most since June 29, 2012. One dollar buys 97.50 U.S. cents.

Poloz, the former head of the government export-financing agency, said companies will boost investment when they’re more confident about global demand. He rejected the idea presented by the opposition New Democratic Party that exporters are hurt by “Dutch Disease” where high commodity prices boost the currency and destroy manufacturing.

The idea that a weaker currency will help exporters “is a very marginal kind of addition” to other considerations including foreign demand, Poloz said. “I won’t offer a running commentary on the Canadian dollar, where it is, and where it should be,” Poloz said in response to an opposition Liberal Party lawmaker’s question.

New Equipment

Some companies aren’t responding to the high dollar by importing new equipment to boost productivity that is lagging the U.S., Poloz said. “Currently we aren’t seeing this trend pan out,” he said, adding he was “reasonably confident” investment will accelerate.

Poloz answered several rounds of questions about whether a long period of low interest rates was creating risks by encouraging consumers to take on too much mortgage debt, including one from committee Chairman James Rajotte of the governing Conservative Party.

Poloz said he’s concerned about the risks of younger families in particular taking on too much debt. “That is exactly what the policy is about, low for hopefully not too long gives you the outcomes you need to get through this crisis, and then as the world unfolds we get back to normal.”

Regulators have taken steps to curb household debt risks and the Bank of Canada has been “clear” to the public about the dangers, Poloz said. Household debt has reached a record 165 percent of disposable income according to Statistics Canada.

Poloz’s opening remarks likened the global recovery from the 2008 financial crisis as being “more like a postwar reconstruction” than an ordinary recession.

The new governor will deliver his first speech in Oakville, Ontario, on June 19 and lead the central bank’s governing council in making its July 17 interest rate decision.  --Greg Quinn, Bloomberg

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