Bank of Canada Governor Stephen Poloz said he expects to continue raising interest rates in spite of mounting trade tensions because inflation has already hit the central bank’s 2 percent target, even as he remained non-committal on the timing and pace of future hikes.
Poloz, speaking to reporters following a speech in Victoria, said the economic “big picture” supports a withdrawal of stimulus given interest rates remain at historically low levels. The central bank also isn’t likely to be derailed by “single-data points,” referring to a string of
disappointing economic numbers in recent weeks, or heightened trade uncertainty whose actual impact remains unknown.
“We’ve said clearly that, given where the economy is, we’re in a situation where the economy will warrant higher interest rates,” Poloz said at the press conference. “We’ll ensure that that is a gradual process because there are certain issues that we must monitor along the way, and we’ve laid those out.”
The speech, and press conference, were Poloz’s last scheduled public appearances before his July 11 policy #decision, with investors placing 50-50 odds of a hike next month, trading in overnight swaps suggests. Those probabilities are down sharply from earlier this month as trade tensions escalated globally and weak economic data cast some doubt about the underlying strength of the economy.
While Poloz’s speech Wednesday focused on why the central bank should avoid over-communicating policy intentions, he was definitive at the press conference about the overall direction of the rate path. The Bank of Canada has already raised interest rates three times since last July, bringing its benchmark rate to 1.25 percent.
“The way we think of this is that the economy is operating very close to its capacity and inflation’s on target, so we’re more or less what I’ve described as ‘home’ in other speeches,” Poloz said. “And the thing that looks odd in that picture is that interest rates are still very low by historical standards.”
Canada’s central bank governor declined to say which way policy makers may be leaning for next month’s decision, but seemed to downplay some recent weakness in economic data, while choosing to emphasis first-quarter gross domestic product numbers that came in exactly as the central bank had predicted. Poloz also said business investment remains “reasonably robust,” giving policy makers optimism.
As far as trade uncertainty is concerned, Poloz said the central bank is focused on the data, not speculation on political developments, and the central bank will incorporate actual developments like U.S. steel tariffs and Canada’s retaliatory measures in its decision-making process ahead of next month’s decision.
“We’re data dependent, not headline dependent,” Poloz said. “We’re not going to make policy on the basis of political rhetoric or any of that.”
The Canadian dollar, which fell after the speech, pared some of its losses after the press conference.
In his speech, Poloz said rising levels of global uncertainty are making it more difficult for policy makers to gauge how economies will unfold, and central banks need to be open about what they know and don’t know. In such an environment, financial markets provide important signals, a function the central bank shouldn’t inhibit with routine forward guidance.
The speech outlined how the central bank’s emphasis has shifted away from mechanically following policy rules dictated by economic models to a risk-management approach that focuses on uncertainty. Poloz said the bank is committed to explaining “what issues we are looking at and how we are thinking about them.” Some of the measurable impacts of U.S. metals tariffs and developments in Canada’s housing finance system however will be incorporated into the deliberations next month.
“Today, as we approach our next interest rate decision, we are working to incorporate in our projections the effects of the recently announced U.S. steel and aluminum tariffs, along with retaliatory measures, both in Canada and globally,” Poloz said in the speech. “We are also analyzing individual-level data to understand how the new lending guidelines in Canada are affecting the housing market and mortgage renewals.”
He added: “We expect these issues to figure prominently in our upcoming deliberations.”
— With assistance by Erik Hertzberg, and Josh Wingrove
(Updates with comment from press conference throughout.)