December 15, 2015 / 7:49 PM / in 2 years

Bank of Canada governor sees divergence with Fed policy

OTTAWA (Reuters) - Bank of Canada Governor Stephen Poloz signaled clearly to markets on Tuesday not to expect him to match potential rate hikes by the U.S. Federal Reserve.

Bank of Canada Governor Stephen Poloz takes part in a news conference in Ottawa December 15, 2015. REUTERS/Blair Gable

Poloz made his remarks a week after saying the bank could cut rates by a whole percentage point if necessary, into negative territory, though he saw no need now.

“Usually you think of the Canadian economy following the U.S. economy fairly closely. This will be one of those places where it really doesn‘t. It will follow; parts of it are following,” Poloz said.

“But as a macro statement, there will a divergence there. We’re already seeing it, and so you should expect a divergence in policy too,” he said.

His comments on monetary policy, critical as the Fed prepares possibly to raise rates on Wednesday, came at a news conference about a Bank of Canada report on Canada’s financial system.

A key difference between the two economies, Poloz said, was that U.S. terms of trade were rising while Canada’s were falling. Terms of trade refer to a country’s export prices relative to its import prices, and in Canada’s case the key is lower oil and commodity export prices.

“This is exactly the situation in which we are glad that we have a flexible exchange rate regime, because that it is an important stress reliever,” he said.

The Canadian dollar is near an 11-year low, and while Poloz says the bank does not target the exchange rate, he has cited the benefits of a weak currency.

He noted that the Bank of Canada’s Dec. 2 rate statement called attention to the expectation that monetary policy divergence globally would remain prominent.

The central bank cut rates twice this year in response to low oil prices, and analysts said Ottawa’s tightening of mortgage rules on Friday gave Poloz more room for maneuver without having to worry as much whether his low-for-long interest rates would exacerbate a hot housing market.

He did say on Tuesday the rate cuts were still working their way through. Asked to react to disappointing manufacturing and other data, he said that while some numbers were soft others were positive and things were more or less in line.

If and when the Fed does raise rates, Poloz said, it was likely Canadian long-term interest rates would rise in sympathy with U.S. bond yields, and the bank would take this into account as it revises its forecasts.

Reporting by Randall Palmer and Leah Schnurr; Editing by Tom Brown

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