March 18, 2014 / 4:13 PM / in 4 years

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

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.

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

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.

When asked whether he could rule out a rate cut, Poloz replied: “No, I cannot,” saying the bank’s stance was neutral, which meant it was weighing the risk of disinflation on one hand against excessive household debt on the other.

“If the balance of risks were to shift so that the risks to the downside on inflation were increased, then we would need to reconsider that balance of risks and our position on it,” Poloz said.

The median forecast in a Reuters poll in late February was for the bank’s first move, a hike, to come in the third quarter of next year.

“The key takeaway is that the long-term growth trend is going to be weaker than the pre-crisis experience,” said Benjamin Reitzes, senior economist at BMO Capital Markets.

The Canadian dollar weakened immediately after Poloz’s comments to C$1.1090 to the U.S. dollar, or 90.17 U.S. cents. It later slid further to C$1.1131, or 89.84 U.S. cents.


For the more immediate future, Poloz said first-quarter economic growth and February inflation would both be softer than in the previous quarter and month.

“What we have seen is that the numbers in the first quarter have been a little shy of what we were expecting,” he said. “It’s easy to point to the weather as a qualitative explainer, but it is hard for us to believe that all of that is just that,”

Excluding the effects of the severe weather that hit Canada and the United States in December and January, he said growth was probably only marginally lower than forecast. “We don’t really think the story has changed.”

In its January report, the central bank projected 2.5 percent annualized growth in the first quarter, down from 2.9 percent in the fourth quarter.

As for inflation, which has stayed below the bank’s 2 percent target for nearly two years, most analysts expect data on Friday to show softer inflation in February, compared with February 2013, when there was a sharp rise in prices. Inflation had jumped to 1.5 percent in January 2014.

“Looking through the short-term volatility, inflation still seems to be running at around 1.2 percent, give or take a tenth or two,” Poloz said.

BMO’s Reitzes said it was unlikely the central bank would react to the weaker growth and inflation outlook by easing interest rates because Poloz emphasized the weakness was temporary.

Writing by Louise Egan in Ottawa; Additional reporting by Randall Palmer in Ottawa and Leah Schnurr in Toronto; Editing by Peter Galloway and Jeffrey Hodgson

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