MONTREAL – Bank of Canada governor Stephen Poloz says he remains focused on achieving his inflation target over the next two years and hasn’t been sending signals that would depress the Canadian dollar in order to boost exports.
“We don’t form a view on what the dollar should be at any point in time,” he told reporters Thursday following his first speech in Montreal since taking the top job at the central bank.
“Our focus is on inflation and is our forecast going to work out that gets inflation back up to target around two years from now. That’s our main preoccupation and markets will choose to grind out an exchange rate independently of that.”
Economists have described Poloz’ recent comments about a possible rate cut as a dovish signal to push down the currency. But he said that view and the bank’s decision in October to no longer talk about when rates will return to more normal levels is merely being “honest.”
“We think that interest rates will stay where they are for quite some time and so issuing a warning that they’re almost ready to go up is not the right timing for this. Of course we believe it will happen as the story unfolds but the destination seems far enough away that we can address that as we get closer.”
His remarks suggested the bank is prepared to keep its trendsetting overnight interest rate fixed at one per cent — where it’s been for more than three years — well into 2015 and possibly into 2016. And, if inflation were to fall further, it might even cut short-term interest rates.
CIBC economist Emanuella Enenajor said Poloz’ comments confirm than bank’s view that the central bank isn’t learning towards a rate cut or hike.
“Overall, no big surprises, but potentially disappointing for those who may have been looking for Poloz to sound more dovish or talk down the currency,” she wrote in a report.
Since breaking with his predecessor in dropping the bank’s tightening bias, inflation has kept sliding, dipping to 0.7 per cent in October, although underlying price pressures remained more buoyant at 1.2 per cent. The dollar has slipped to 93.98 cents US.
Poloz said it was only natural that many currencies would rise against the U.S. dollar after the economic crisis prompted the world’s largest economy to ease its monetary policy. But as confidence grows south of the border on improving economic data, other currencies, including the loonie, should be expected to reverse direction.
However, the magnitude of the change depends on many factors, including oil prices and Canada’s reputation as a place to invest.
Poloz also said housing demand is following a predictable course, initially slowing as federal officials tightened mortgage insurance rules and underwriting standards and then increasing as buyers advanced their purchases as long-term interest rates began to rise in the summer.
But he doesn’t expect a housing crash or large correction since prices have gradually risen over five years rather experiencing a sudden surge as has been seen in the past.
“This time that rise in prices has been much more of a several-year creep and therefore it appears significantly less bubbly (but) nevertheless vulnerable to a new shock, that’s our main concern.”
Earlier, he told a business audience at the Canadian Club in Montreal that it may take a couple of years before inflation returns to the bank’s two per cent target, which he called “sacrosanct.”
In fact, Poloz’s speech suggested he might be cutting rates right now if he were not fearful of adding more fuel to an already overheated housing market and near record levels of household debt.
“Our current monetary policy weighs this risk against the risk of inflation falling even further below our target,” he said. “This zone of balance is relevant today and in prospect, as we expect both of those risks to diminish over the next two years or so.”
The speech is likely to cement Poloz’s reputation as a hawk on inflation, perhaps even more so than his predecessor Mark Carney who, at times, appeared to look through temporary dips and surges in consumer prices.
Poloz argues explicitly that while there are concerns that four years of super-low interest rates could trigger an inflationary spiral, people “needn’t worry” as he is confident central banks will be able to handle the removal of stimulus in a way that will keep inflation from taking off.
He offered no such clear assurance about deflation, although he believes central banks are keeping it at bay through extraordinary levels of stimulus, including quantitative easing in some countries.