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Bank of Canada's Poloz says stimulative rates needed for temporary soft patch

OTTAWA — Bank of Canada governor Stephen Poloz says the economy needs a longer lift from stimulative interest rates to overcome domestic and global economic hurdles, though he predicts the country’s recent economic weakness to only be temporary.

With increasing concerns about global trade wars and heightened caution from other central banks, markets will scrutinize Poloz’s remarks in Iqaluit, Nunavut, for clues about the path of the bank’s key interest rate.

Unlike the bank’s statement less than a month ago, Poloz’s address made no reference to future rate hikes.

Poloz noted the difficulties related to the late-2018 drop in oil prices, the cooler housing market and ongoing global trade uncertainty — and then argued there are also “many areas of encouraging economic growth.”

“Clearly, there are challenges in the Canadian and global economies that we need to manage,” Poloz said in his speech to the Baffin Regional Chamber of Commerce.

“But there are clear signs that Canada is adjusting to the challenges.”

The central bank left its key interest rate unchanged last month and said there was more uncertainty about the timing of future hikes because Canada had entered a soft patch.

Canada’s surprising economic deceleration in the final three months of 2018 and worries about the global outlook have fed market predictions Poloz’s next move could, in fact, be a rate cut.

Late last month, recession concerns rose after the yield for Canada’s 10-year bonds fell below the rate on bonds maturing in three months. It was Canada’s first yield-curve inversion since 2007 — at the start of the financial crisis — and investors see it as a sign a recession could be on the way.

Poloz’s optimism Monday about the future could ease speculation the central bank could lower rates.

The economy, he added, has been showing signs of strength. The number of people working in Canada expanded by two per cent over the past 12 months, wages have grown at a solid pace and exports in services have been healthy.

In another positive development, numbers released last Friday showed the economy grew by an unexpectedly strong 0.3 per cent in January.

“The data are currently giving us a mixed picture and need to be carefully monitored,” Poloz said Monday.

The decision to leave the rate unchanged last month marked the third-straight policy meeting that the rate stayed at 1.75 per cent. Before the quieter stretch, Poloz had responded to Canada’s stronger economic performance with five rate hikes between mid-2017 and last fall.

The next interest-rate announcement is April 24, when the bank will release its latest economic projections.

The bank will also provide an update on its view of the neutral range for interest rates, which is the preferred level when the economy is running at full capacity and when inflation is within its target zone of one to three per cent. The Bank of Canada has estimated it at between 2.5 and 3.5 per cent.

Following last month’s policy decision, the bank said interest rates will still need to rise over time to return to their neutral range.

Andy Blatchford, The Canadian Press