Bank of Canada head explains why Canada’s interest rates are so low

TORONTO – Bank of Canada governor Stephen Poloz says with the economy running at close to full tilt, a mechanical approach to setting interest rates would suggest higher borrowing rates should already be in place.

But in a speech Thursday, Poloz said the central bank has been focused on scrutinizing some “unusual factors” at play, including encouraging signs companies are starting to expand their capacity by investing in equipment and by hiring more people.

In prepared remarks of his address released in Ottawa, he said wages have been growing and the workforce has seen a sudden jump in participation by young people.

“Given the unusual factors at play, the bank is monitoring these risks in real time _ the term we use for this is data dependent _ rather than taking a mechanical approach to policy setting,” Poloz said in a speech to Canadian Club Toronto.

Poloz said the bank’s governing council believes there’s still more room, albeit diminishing, for the labour market to grow before it starts pushing inflation higher. That factor could be providing an offset to the upward pressure from an economy operating close to its capacity and growth forecasts above potential.

He did acknowledge, however, that the current policy setting “clearly remains quite stimulative.”

“With the economy operating near potential, a mechanical approach to policy would suggest that monetary policy should already be less stimulative,” Poloz said.

The central bank introduced two rate hikes this year due to the strong economy – once in July and again in September.

But since then, Poloz has kept the rate on hold, including at last week’s announcement. He pointed to uncertainty over trade and a greater-than-expected weakness in exports as reasons to stand firm.

Still, he continued to warn that higher interest rates will likely be required over time, even though the bank will proceed with caution by carefully assessing the incoming data.

The theme of Poloz’s speech Thursday focused on three “slower-moving, nagging issues” that keep him awake at night. He described them as concerns that are a little different than the more-pressing, immediate issues.

His list included high house prices and household debt, cyber threats and the difficult job market for young people.

“I hope I have not spoiled your festive, pre-holiday mood by talking about my pre-occupations,” he said.

“In case I have, let me repeat that the economy has made tremendous progress over the past year, and it is close to reaching its full potential. We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time.”

By Andy Blatchford in Ottawa