Poloz Says Canada Policy Rates Will Rise If Headwinds Dissipate

(Bloomberg) -- Bank of Canada Governor Stephen Poloz said he still believes policy interest rates would likely need to rise if the slew of factors slowing the expansion vanish.

Speaking to lawmakers at a Senate committee hearing, Poloz said accommodative rates are needed to sustain the recovery right now because of headwinds, such as trade tensions, hampering investments. At the same time, a policy rate of 1.75 percent means that in real terms -- after accounting for inflation of about 2 percent -- borrowing costs are actually negative, he said.

“It is hard to believe that the economy would settle in in a place where it’s growing at potential, and inflation’s on target, and we have unemployment at a 40-year low, and that we’d need a negative real rate of interest in order to sustain that,” Poloz said. “What we need to see is that those headwinds dissipate, and if those headwinds dissipate, then interest rates would rise.”

The comments suggest that Poloz continues to believe higher borrowing costs are more likely than cuts, even after the Bank of Canada formally dropped its hiking bias at a rate decision last week and indicated a prolonged pause. The Bank estimates the neutral rate of interest -- a level that is neither stimulative or contractionary -- at a range of between 2.25 percent to 3.25 percent.

That estimate of the neutral rate “is our best thinking around where would it naturally go to, because we don’t want people to think that they would just keep rising and rising and rising,” Poloz said.

©2019 Bloomberg L.P.