–Watching Data, To Use Judgment
By Gordon Isfeld
OTTAWA (MaceNews) – The chief architect of Canada’s monetary policy Thursday cautioned that there are limits to what the central bank can do to ensure stability and economic growth – without fanning inflation.
“We have learned over time just how powerful monetary policy can be,” governor Stephen Poloz told the Chamber of Commerce of Montreal.
The central bank’s inflation-targeting policy “has led many to conclude that keeping inflation low and stable and predictable is the best contribution that monetary policy can make to the economy,” Poloz said.
But there are limitations to monetary policy and its ability to solve all economic problems, the governor added.
“The first limitation is that since monetary policy has only one instrument, the Bank cannot use interest rates to target more than one variable. Ultimately, inflation is the sole target of the policy,” the governor said.
The second limitation is the fact that keeping inflation low can still lead to a buildup of dangerous imbalances, the governor added, such as high levels of household debt.
The Bank of Canada has raised its key lending rate five times since mid-2017 – taking the level up to 1.75 per cent.
“As we said at the bank’s most recent interest rate announcement, we judge that we will need to move our policy rate up into a neutral range over time, to a point where it is not stimulating or constraining economic growth,” Poloz told his Montreal audience.
“However, the path back to that neutral range is highly uncertain. We will watch the data as they come in and use judgment to deal with the uncertainties and manage the associated risks.”
Changes in Canada’s housing market and business investment remain key sector themes of the economy – areas that the Bank of Canada is watching closely.
“The reality is that conducting monetary policy requires a lot of judgment,” Poloz said, adding that the central bank “began withdrawing its extraordinary stimulus raising interest rates by a total of 1.25 percentage points to 1.75 per cent.”
“But with the rate still lower than inflation it is clear that monetary policy continues to deliver stimulus to the economy today.”
The bottom line, according to Sal Guatieri, senior economist at Toronto-based BMO Capital Markets, is that Poloz and his policy team are “still leaning toward lifting rates, but not by much and not anytime soon.”
“The key theme here is uncertainty and the fact that it has risen and likely won’t fade away for a while,” said Guatieri. Poloz “repeated that households are more sensitive to higher rates due to elevated debt. He didn’t play up the recent rebound in oil prices, though this is one item that could improve the investment picture.”