The Bank of Canada (BoC) is maintaining rates for now, but not everyone is supportive of the cautious stance.
For example, David Dodge, former BoC governor, tells Bloomberg that raising rates is the wise thing to do, considering the economy is close to capacity. Further, low rates encourage excessive borrowing by households and businesses — a factor the BoC should emphasize more, says Dodge.
In Governor Stephen Poloz’s opening statement before the House of Commons finance committee on Tuesday, he agreed that the economy is operating close to its capacity, and that “the economy is likely to require less monetary stimulus over time.”
However, he said, “We will be cautious in making future adjustments to our policy rate.”
That’s because of “significant uncertainties.”
Risks to rate hikes
In particular, the BoC “will be guided by incoming data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation,” Poloz told the committee.
For example, BoC data on housing and debt reveal the economy is likely to be more sensitive to interest rates than in the past.
“However, we will watch incoming economic data closely for evidence to support this idea,” Poloz said. “We will also look to see how the household sector is responding to the new rules about mortgage underwriting.”
Signs signalling economic slack include a “below trend” labour participation rate for young workers and average hours worked.
Likewise, a slack labour market and, potentially, globalization, negatively affect wage growth, he said.
These and other risks in the monetary policy report suggest “a balanced outlook for inflation,” he said.
The BoC forecasts 2% inflation for the second half of 2018.