Canada's Poloz sees a future of slower growth, low rates

Tue Mar 18, 2014 3:29pm EDT
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By Richard Woodbury

HALIFAX (Reuters) - It is unlikely that bad weather has been entirely to blame for recent economic weakness in Canada, central bank Governor Stephen Poloz said on Tuesday as he warned about the risk of a prolonged period of sluggish growth and low interest rates.

In a speech viewed by analysts as slightly dovish, Poloz confirmed what many have already forecast for the near term: first-quarter growth will be softer than the 2.5 percent annualized rate the Bank of Canada forecast a few weeks ago, and inflation will soften in February after two reassuring months of pickup.

But it was Poloz's longer-term outlook that grabbed the market's attention. While he sees Canada's economy growing by about 2.5 percent a year over the next two years, it is likely to expand by only around 2 percent a year beyond that, he said.

The sluggishness globally and in Canada will not be just due to the lingering effects of the financial crisis, Poloz said. He said demographics will also play a role, particularly the retirement of baby boomers and the preference they have shown for putting savings into real estate rather than productive assets like stocks.

"The demographic forces that are in play suggest that the growth trajectory that we converge on after the recovery period will be slower than our historical trend, and it will also be associated with lower equilibrium rates of interest," he said of Canada in the speech.

He added that the risk of "secular stagnation" needs to be taken seriously, and that low investment and high savings could mean that interest rates stay low for longer and that even ultra-low policy rates might not provide as much stimulus as they have in the past.

Scotiabank economists Derek Holt and Dov Zigler said the comments reinforced their view that the Bank of Canada will keep its main policy rate at the current 1.0 percent until the fourth quarter of 2015 or later.

"This longer-run guidance is material to a low-for-long dovish Bank of Canada bias beyond the printed forecast," the Scotiabank economists wrote in a research note, referring to bank forecasts extending to the end of 2015.   Continued...

A cyclist rides past the Bank of Canada building in Ottawa July 17, 2012. REUTERS/Chris Wattie