June 29, 2015 / 3:55 PM / 4 years ago

Bank of Canada's Poloz says rate cut was needed to balance risks

Bank of Canada Governor Stephen Poloz takes part in a news conference in Ottawa June 11, 2015. REUTERS/Blair Gable

OTTAWA (Reuters) - Bank of Canada Governor Stephen Poloz defended on Sunday the central bank’s surprise interest rate cut early this year, saying last year’s big drop in oil prices made the cut necessary to keep policy in a “neutral zone” where risks are balanced.

Speaking on a panel at the Bank for International Settlements’ annual general meeting in Basel, Switzerland, Poloz acknowledged that the quarter-point rate cut in January was “very controversial”, with some saying the bank was making financial vulnerabilities worse by encouraging more borrowing.

But the shock of cheaper oil, which is a major Canadian export, threatened to reduce national income and increase leverage ratios whether Canadians were borrowing more or not, Poloz said.

“Accordingly, acting to cushion the blow to the economy by cutting rates actually mitigates the rise in those leverage measures,” Poloz said in a video of his remarks that was posted on Monday. “In other words, there are risks associated with doing nothing, too.”

Canada’s robust housing market has helped support the country’s economy in the years since the global financial crisis and the consumer debt-to-income ratio sits near a record high, prompting concerns that Canadians have become over-stretched.

“When we cut rates to stabilize the economy, we don’t picture some heavily indebted household going out and adding to their debt pile,” Poloz said. “Rather, we picture a household with no debt at all deciding finally to buy a house and taking out a mortgage.

“It’s true that aggregate leverage goes up in the process but it’s not obvious that it’s less sustainable.”

The Bank of Canada cut its main policy rate to 0.75 percent in January, catching markets off guard and leading some to criticize the bank’s communication strategy. Its next rate decision is in mid-July, when the bank will also update its economic forecasts.

Reporting by Leah Schnurr; Editing by Peter Galloway

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