December 18, 2015 / 10:45 PM / 3 years ago

Bank of Canada: Fed didn't need 'scary' inflation to act

OTTAWA (Reuters) - It is unsurprising for the U.S. economy to recover before others and therefore it makes sense for the Federal Reserve to be the first to begin hiking interest rates, Bank of Canada Governor Stephen Poloz told Reuters on Friday.

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

The Fed did not have to have “scary inflation” for it to act, saying that if central bankers wait until inflation is at or above their target and the economy has too much momentum, they could have a problem, he said.

The Fed hiked rates for the first time in nearly a decade on Wednesday, at a time when other central banks are easing or maintaining accommodative policies, and Poloz said policy divergence was to be expected.

“Divergence doesn’t mean (other central banks’) cutting rates necessarily. It could mean constant rates, it could mean rates going up more slowly. It’s just divergence,” Poloz said in the bank’s headquarters.

“We can’t forget our history,” he said, noting that the financial crisis started in 2007 and 2008 in the United States, and the United States has done the best job anybody could do cleaning it up.

“And so, no surprise that the U.S., I think, is coming out of it before others. So there’s an uncorrelated upturn in play, and some would say the upturn is still to be seen in certain places,” he said.

“So, since it’s coming out first, then it just makes logical sense to be the first to begin normalizing policies.”

He pointed to his frequent assertions that when the Fed did begin hiking it would be reassuring for Canada because it would underscore the confidence the United States has in its upturn.

“So it’s good for us, and we can see it in our numbers that the U.S. is pulling us up,” he said.

Canada might see some drifting up of its bond yields along with the U.S. yield curve, and the bank will take that into account in setting policy, he said.

“The exchange rate has already depreciated in this context, again, not surprising given the forces we’ve identified,” he said, noting the negative effect on Canada of lower oil and commodity prices.

The stronger U.S. dollar was redistributive, causing some U.S. spending to leak elsewhere outside its borders, he said.

He characterized as “unambiguously good news” that the Fed hike was in the context of a stronger U.S. economy which seems still to be gathering momentum.

For an interview with San Francisco Federal Reserve Bank President John Williams:

Reporting by Randall Palmer, Leah Schnurr, Amran Abocar and Dan Burns; Editing by Meredith Mazzilli

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