Below are some key quotes from an appearance on Wednesday by Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins in Ottawa after the central bank left rates on hold.
POLOZ ON HAVING TO EVALUATE DATA AS IT COMES IN
“So we have to interpret all those data as they come along and revalidate our story, in real time … we learn from every data point.”
POLOZ ON POLICY OUTLOOK
“There’s nothing automatic, no predetermined path for interest rates, only a clear assessment that yes, over time, if the economy continues to behave as it has less monetary stimulus will be needed because the economy will be getting very close to home.”
POLOZ ON REASONS FOR CAUTION
“Our caution comes from not knowing for sure how the economy will react to interest rate hikes that we’ve already made, the mortgage rule changes that have been put in place, how it’s reacting to that extra growth in terms of supply creation, and how the inflation process is behaving given these global forces that appear to be acting on inflation.”
POLOZ ON ECONOMIC GROWTH, MODERATION
“The economy has been extraordinarily strong in the first half of this year, and we said in July that it would for sure moderate as we got into the second half of the year and it is indeed happening. That moderation is welcome because 4.5 percent growth is not sustainable in any economy like ours.”
POLOZ ON ECONOMIC EXPANSION
“One of the key indicators of that process would be net firm creation, the population of companies, and you know that is one of my favorite variables, and it has really not shown what we’re looking for yet. It’s proving to be a very slow process. Compared to the United States or compared to the UK we are definitely not producing new companies in the way they are. And so it may just be because we’re still working off the legacy of the oil price shock, that’s our base hypothesis, that we’re hitting the sweet spot, not in it but hitting it.”
POLOZ ON NAFTA IMPACT ON CORPORATE INVESTMENT:
“As indicated in the report, we’ve embedded a degree of judgment in our investment outlook, which is to say, companies are investing less than they would without the uncertainty around NAFTA. Even though investment intentions are solid … even though investment numbers are much better than last year, its all less than it would be without that uncertainty.”
POLOZ ON POTENTIAL TO BE SURPRISED IN EITHER DIRECTION
“We must be open, we could be surprised in either direction relative to our forecast. But we need to be extremely interpretative of those movements.”
POLOZ ON BEING IN A SITUATION WHICH IS DIFFERENT FROM NORMAL
“When you are in a situation which is different from normal, which we are, then you use your models as your guide, but you expect deviations and behaviour relative to those models.”
WILKINS ON C$ PASS-THROUGH EFFECT
“The appreciation in the Canadian dollar does have a significant pass-through effect on inflation that peaks at around, takes up about 0.5 percentage points from inflation by the second quarter of next year, which is worth mentioning … but it is also a transitory effect that we’d look through.”
POLOZ ON ECONOMIC CAPACITY
“In the production side of the economy, all the things we look at suggest the economy is basically at full use of its resources, and in fact in about 75 percent of the sectors in the manufacturing sector they are above capacity levels, they are operating above capacity. So what that means is those companies are very ready to invest.”
“What we expect at this point in the cycle, I call it the sweet spot, is where you actually generate more growth than you were predicting and less inflation than you were predicting because you are expanding the capacity of the economy, the supply side, and demand is barely keeping up with it.”
WILKINS ON HOUSEHOLD INDEBTEDNESS
“When households are more indebted what happens is that any particular increase in interest rates is going to have a bit more of an impact on the amount of money they have at the end of the day to spend on other things, so that consumption channel that you talked about is definitely present, and more likely higher the higher the debt level is.
“But at the same time, the ability of households to borrow more money, to get more credit to buy new things is also going to be more constrained than it would have been in the past, at least for the households that are already quite indebted, because they are either going to need collateral or they are going to need the income to be able to support that, and there are limits to how much you can borrow.”
POLOZ ON RELEVANCE OF U.S. FED OVER LAST TWO YEARS:
I think quite relevant. If you think about the long sweep, the oil shock that we went through end of 2014 into 2015 had us cutting rates in the same year that Fed raised rates. Which does a couple of things. It just demonstrates how divergence can occur and how an independent policy needs to be directed at your objectives, not someone else’s. But it also gave us in effect about a two year delay in the process of getting back home. So in that sense, the U.S. now is out in front of us whereas we were more similarly situated before oil shock came along.
POLOZ ON ECONOMIC IMPACT OF CHILD BENEFIT:
I don’t think I should comment on the specifics of what the government has tabled. But I can go back and say, yes the Canadian child benefit, which hit mailboxes just over a year ago … we calculate, it added up to 0.5 percentage points onto the level of GDP. So if we go back to where we were working with a 1 or 1-1/2 or 2 percent output gap, using up half a percentage point of that with that one policy alone was a significant contributor to us getting back home. The alternative during the oil price shock would’ve had to been even lower interest rates in order to have same effect.
POLOZ ON CHANGE PROPOSED BY GOVT TO CHILD BENEFIT:
As for the change, at the moment, it doesn’t sound anywhere near as large as what was done last year. It’s just making it, in real terms, its maintaining it. But I’m not going to speculate on what it means in terms of stimulus or non-stimulus.
POLOZ ON NAFTA IMPACT ON MONETARY POLICY:
“The NAFTA risk is outside of our projection for I think evident reasons. We simply don’t know enough about what may happen. The range of possibilities is too large for us to analyze. And even so, if something does happen in the NAFTA context, it could take quite some time after a decision is made before it’s actually implemented. We need to take those decisions into account in due course when they come.
“At the moment, we’re more preoccupied with the four issues that I outlined in more detail.”