Poloz Sees Higher Rates as the ‘Natural Tendency’ for Canada’s Economy

(Bloomberg) -- Bank of Canada Governor Stephen Poloz said he still believes interest rates are poised to continue rising once headwinds to growth dissipate.

Speaking in an interview with Amanda Lang on BNN Bloomberg, Poloz said there’s still a lot of evidence of underlying strength in the economy and the current slowdown is likely just a “detour.” Headwinds, particularly high household debt and trade uncertainty that is crimping business investment, are forcing the central bank to keep borrowing costs below where they would likely be otherwise.

“The natural tendency is for interest rates to still go up a bit,” Poloz said in the interview, which aired Friday. “I don’t really know how much a bit is, and what the timing might be. It depends on our forecasts coming true, that the slowdown is temporary and getting through all that and getting back on the track we were say a year ago, and that’s going to take some doing.”

The comments underscore the governor’s confidence that the nation’s expansion remains on solid footing, and the economy will emerge from a recent soft patch. It’s a view that puts him at odds with investors betting growth will slow further and that the central bank’s next move will likely be a rate cut. Markets are placing odds of a cut over the next year at about 50 percent.

The Bank of Canada has raised borrowing costs five times since 2017, but recently indicated it won’t move any higher for now amid a slowdown that brought growth to a near halt at the end of last year.

Asked whether his recent dovish tilt was premature, Poloz said it was triggered by an abrupt and synchronous global slowdown, stoked by trade uncertainty, that has kept companies from investing. That required a cautious approach to policy, he said.

“These are sentiment-driven, soft things,” Poloz said. “You can’t model that mechanically and expect to predict how much a trade war and rhetoric is going to affect those things.”

Yet, if those trade concerns get resolved, the rebound could be swift.

‘Positive’ Scenario

“Sentiment can turn around very quickly if there’s a resolution,” Poloz said. If “sentiment goes up, investment will recover and we’re back into the positive scenario where I think the global economy can grow for a long time.”

Poloz also speculated some of the recent weakness in the data may be understating strength in services, particularly technology, that is more difficult to measure. He said the recent run of strong jobs data probably reflects a truer picture of the economy. Canada has added 426,400 jobs over the past 12 months, the largest one-year increase since 2007.

“Our traditional measures capture the stuff that you can drop on your foot much more easily than the service sector,” said Poloz. “The good news is there is something positive happening in addition to a gradual rebuilding process, and so it’s adding up to a pretty good picture, and probably the labor market is telling us the truth.”

Growth in the services sector may also be fueling increases in capacity that are keeping inflation in check, he said.

Poloz also said he would “frown” upon any weakening of mortgage qualification rules that are helping to improve the quality of new credit and slowing price appreciation in some markets like Toronto and Vancouver.

Poloz, who is entering the final year of his seven-year term next month, was also asked whether he would agree to stay at the job longer if asked.

“That’s obviously one of the options,” he said. “There are a lot of different scenarios we can sketch out. I’m not putting a lot of energy into it.”

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