–Repeats Rate Hike Not Right Tool To Cool Housing Market
OTTAWA (MNI) – Bank of Canada Governor Stephen Poloz told lawmakers Thursday that the Canadian economy has not reached that “almost magic stage” where new companies are created, in turn creating new products, new exports and new jobs in a self-sustaining manner.
“That self-sustaining upward momentum has not been established yet” in Canada, he said during a testimony with Senior Deputy Governor Carolyn Wilkins before the Senate Committee on Banking, Trade and Commerce.
The UK economy has resumed that “natural growth process,” he continued, as has the U.S. “I believe we are not far behind, but it’s something we have to wait and see.”
The BOC repeated in its policy statement Wednesday that “material slack remains” in the Canadian economy, unlike the U.S., which is “close to full employment.”
A major concern in Canada is weakness in business investment, with ongoing uncertainty about U.S. trade and fiscal policies holding back companies.
That being said, Poloz told senators, there are a lot of indications that “animal spirits are stirring in the United States.”
“That’s often contagious across the border,” he said. So as certainty increases about the future of NATFA in particular, “I think we’ll see that general lift.”
In its Monetary Policy Report Wednesday, the BOC revised up its 2017 real GDP growth projection by 0.5 percentage points to 2.6%, mostly due to a stronger contribution from housing, now seen adding 0.3 points to growth instead of trimming it by 0.1 point as projected in January.
Business investment, on the other hand, is seen cutting growth by 0.2 points, instead of 0.1 point.
Poloz said that in its forecast, the BOC has been “quite conservative” regarding investment in light of such uncertainties. “That just means that there is some upside risk if everything gets clarified,” he said.
On the housing front, while data have been surprising on the upside, the BOC still expects a slowdown, just later than it had predicted in January.
Poloz indicated again Thursday that despite the strong price gains in the Greater Toronto Area, the central bank would not hike rates to address the issue as such monetary tightening would weigh on the entire economy. A rate hike is simply not the right tool, he said.
Overall, the central bank expects the output gap to close in the first half of 2018, a timing that was moved forward from mid-2018.
If not for the fiscal stimulus announced in last year’s budget, however, the output gap would take longer to close, Poloz said.
–MNI Ottawa Bureau; +1 613 869-0916; email: firstname.lastname@example.org