April 18, 2018 / 3:50 PM / in 4 months

HIGHLIGHTS-Bank of Canada's Poloz and Wilkins speak after holding rates steady

TORONTO, April 18 (Reuters) - The Bank of Canada held interest rates steady on Wednesday, as expected, but said more hikes will be needed over time and pointed to a pick up in wage growth and inflation, two issues that have concerned the central bank.

POLOZ ON WHEN HIGHER RATES WILL BE NEEDED:

“Given where the economy is, then it’s very likely that higher interest rates will be warranted over time, but we can’t be definitive about when or at what pace, because those underlying issues are all evolving differently, and they’re not that observable. We need to watch how the data are performing and do our job of balancing those risks from decision to decision.”

POLOZ ON THE NEED FOR STIMULUS IN THE FUTURE:

“In the statement it says clearly that the governing council believes that interest rates will move higher over time, and that some of the things that we’re monitoring are likely to be there for some time, therefore that it is very likely that we will still need some stimulus, albeit perhaps less than today, some time in the future, in order to maintain our inflation target.”

BOC’S POLOZ SAYS ECONOMY IS IN A GOOD PLACE, BUT “ALL IS NOT QUITE NORMAL”

“The economy is in a good place, it has reached almost, we think, or very close to its potential capacity output. Inflation is at 2 percent. That’s a good starting point since that’s the destination. However, all is not quite normal. Interest rates are still very low.”

POLOZ SAYS THERE ARE FORCES PREVENTING ECONOMY FROM GETTING WHERE IT IS TODAY WITHOUT POLICY ACCOMMODATION:

“There are things acting on the economy, some of which are a legacy of the financial crisis, the accumulation of debt, the uncertainty around NAFTA, the competitiveness challenges. It is a long list of things that are in the background that would be preventing the economy from getting all the way where it is today, all by itself.”

WILKINS ON MODELING INFLATION:

“I would just say that as important as getting potential right, it’s also making really good calls on what are the temporary factors affecting inflation. And last year when it was lower, we knew we still had excess capacity, though maybe we had more than in our numbers, but we also knew that there were temporary effects coming from the energy rebates, from food and other factors, and making those calls are really important because it means that you don’t over-steer.”

POLOZ ON THE SERVICES SECTOR:

“By the way, I think later this year Statscan will begin monthly, as opposed to quarterly, service export and service trade data, which will be a good enhancement and it will (be) a little more prominent in the month-to-month discussions of these data. But also investment in the service sector looks different from what we’re used to in the goods sector, where you got to have a factory and machinery to do things and so on, whereas in services, it could be more abstract. It could be software, purchased on the clouds. You don’t actually buy anything, some of the investment itself looks like it did not happen, even though there is a payment every month for the underlying investment return. In some ways the economy is evolving in ways that will be a challenge for the data gatherers to stay up with.”

UNCERTAINTY IS ABOUT SCALE AND PACE OF INTEREST RATE HIKES:

“The economy would appear to be warranting higher interest rates over time. Our uncertainty is about how much and at what pace and the four areas of uncertainty that I highlighted basically distill all that uncertainty down to their implications for the inflation outlook.”

INTEREST RATES ARE VERY LOW AND WILL MOVE HIGHER OVER TIME:

“Interest rates are very low considering that the economy is pretty well at capacity, inflation is at two percent. So there is a sense, almost by law of gravity, interest rates will move somewhat higher over time.”

MORE WIDESPREAD BUSINESS INVESTMENT WOULD INCREASE THE BANK’S CONFIDENCE:

“Investment continues to grow and so the more that becomes widespread then that increases our confidence.”

POLOZ ON INCREASE IN INFLATION AND WAGES:

“If you go back to last summer, our three core measures were well below 2 percent, one of them was showing a sign of turning up, our model suggested that we would be at 2 percent by now, and sure enough that’s what has happened … That gives us renewed confidence that we’re on the right narrative, and so that one has made us quite comfortable. Wages are reassuring as I said, they have picked up the pace since last summer, fall, but there are question marks around those data points so it’s not fully baked.”

POLOZ ON DATA AND DECISION MAKING:

“It’s encouraging, but I don’t associate that progress mechanically with any decision making process. What we’re looking for is a growing level of comfort with the narrative.” (Reporting by Allison Martell, Fergal Smith and John Tilak Reporting by Denny Thomas)

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