Global economy indicates stimulus can be ‘steadily withdrawn’: Poloz

By Staff, with files from The Canadian Press | November 5, 2018 | Last updated on November 5, 2018
3 min read
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Editorial note: This story was updated at 2 p.m. EST to add commentary on the neutral rate.

The governor of the Bank of Canada says that, after a decade of low interest rates around the world, the global economy has reached stronger footing where stimulus can be “steadily withdrawn.”

Stephen Poloz’s remarks Monday came as the Bank of Canada signals it will gradually raise its benchmark interest rate from its current level of 1.75% to a so-called neutral stance of somewhere between 2.5% and 3.5%. The big question is how quickly the rate will rise.

Poloz recently introduced the central bank’s fifth interest rate hike in 15 months and warned Canadians, many of whom are carrying high levels of debt, to get used to the idea of 3% interest rates as the new normal.

In prepared remarks of Poloz’s speech Monday in the United Kingdom, he said the world economy has made considerable progress in shaking off the effects of the 2007-08 financial crisis. Interest rates around the world have remained very low over that period.

“After a decade of extraordinary effort by central banks to flood markets with liquidity, the global economy has reached the stage where stimulus can be steadily withdrawn,” said Poloz’s speech to the Canada-U.K. Chamber of Commerce.

He also said the risks of international trade actions, both actual and threatened, have preoccupied investors. And he attributed poor TSX performance this year to the index’s heavy weight of companies reliant on trade.

But he argued that trade risks are two-sided, and resolutions to disputes can provide fresh economic lifts.

“We have seen exactly this dynamic play out in Canada, as fears that [the North American Free Trade Agreement] would be torn up have been replaced with relief after agreement on the United States-Mexico-Canada trade agreement,” he said.

“In general, it is not appropriate for a central bank to formulate policy based on only one side of a risk distribution. Rather, the Bank of Canada must attempt to weigh both the upside and downside risks and take a middle, risk-balanced path.”

Poloz reiterated Monday that Canada’s projections for economic growth and inflation mean interest rates will continue to move higher. The central bank raises rates to keep inflation from climbing too high.

The Bank of Canada, he added, will decide on the appropriate pace of the increases based on how well the economy adapts to higher interest rates established by earlier hikes, given the high levels of household debt.

He also said the central bank will pay close attention to new developments in international trade.

More on the neutral rate

Speaking to reporters after his speech, Poloz noted said the eventual destination range for his key interest rate target (estimated at 2.5%-3.5%) is “sufficiently uncertain” and could glide up or down.

“Everything in economics has a wider range around it than we realize, but still it’s sufficiently uncertain and […] it’s, in principle, movable,” Poloz said in response to a reporter’s question about the uncertainty around the estimated range.

“Developments in the world economy could cause it to drift up or down because there are a lot of global ingredients to that, not just a purely Canadian phenomenon.”

Poloz said Monday the Bank of Canada’s neutral range matches the estimate for the United States. He noted there are different ways to calculate the range, and there’s uncertainty around all the parameters that feed into it.

“All we know is that as we get closer to it—whatever it is—we’ll begin to see signs that we’re no longer stimulating demand, and, in fact, we know if we cross into the neutral zone we may see signs that we’re beginning to constrain demand,” he said.

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Staff, with files from The Canadian Press

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