Bank of Canada's Poloz Defends Risk-Management Approach to Rate Policy -- 2nd Update

12/14/17 04:47 PM EST
By Paul Vieira 

OTTAWA -- Bank of Canada Governor Stephen Poloz said Thursday he is willing to keep rate policy "quite stimulative" and let upside inflation risks build until there is evidence spare capacity in the labor market has evaporated and uncertainties in the economy have faded.

In a speech in Toronto, Mr. Poloz reiterated the central bank would employ a cautious approach in rate-policy setting after two increases in 2017, due to a set of "unusual factors" playing out in the economy. These factors include how indebted households will respond to higher rates, the impact of new mortgage-financing rules on the economy, and the fate of talks aimed at addressing Trump administration concerns with the North American Free Trade Agreement.

In a rate decision last week, the Bank of Canada kept its benchmark interest rate unchanged at 1% and signaled rates would eventually rise -- although with the caveat that caution would be the watchword for the foreseeable future. Mr. Poloz, according to prepared remarks, elaborated on this approach.

"Our current policy setting clearly remains quite stimulative," he said. "With the economy operating near potential, a mechanical approach to policy would suggest that monetary policy should already be less stimulative. However...we still see signs of ongoing, albeit diminishing, slack in the labor market."

At a press conference afterward, Mr. Poloz said markets shouldn't treat "cautious" as code for rates remaining on hold for an extended period. "It's like anybody driving in a snowstorm -- you drive a little slower, and you watch all the signs along the way to make sure you stay on the road" until you arrive at the destination.

He added that incoming economic indicators will dictate whether central-bank concerns about some uncertainties remain justified.

For example, in his speech Mr. Poloz cited the relatively low labor participation rate among Canadians age 15 to 24 as a concern on top of tepid wage growth. He said the proportion of people in this category participating in the workforce fell to roughly 63% earlier this year, a decline of 5 percentage points from a peak reached a decade ago. The participation rate for younger Canadians has climbed back to 64%, the governor said, and wages have also exhibited strength. "These are encouraging signs, but it will take a while before they become a trend."

Mr. Poloz said the bank was engaged in a risk-management exercise and acknowledged that growth above potential output -- or the rate an economy can expand without triggering inflationary pressure -- as is presently forecast could pose an upside risk to its inflation forecast. "Given the number of unusual factors at play, the bank is monitoring these risks in real time...rather than taking a mechanical approach to policy setting," the governor said.

Some economists warned after the last rate decision, the Bank of Canada was at risk of keeping monetary policy too loose, given some of the strength emerging from labor data. Roughly 350,000 full-time jobs have been added to the economy this year, and the unemployment rate has dropped to a near-record low of 5.9%.

The thrust of the speech was on issues that preoccupy the governor. Among the issues he cited was a cyberattack on Canada's financial system; vulnerabilities posed by household debt and housing, which he said are likely to remain elevated for a long time; and the job market for youth.

Write to Paul Vieira at paul.vieira@wsj.com

 

(END) Dow Jones Newswires

December 14, 2017 16:47 ET (21:47 GMT)

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