Bank of Canada: degree of untapped potential remains in economy

KINGSTON, Ontario (Reuters) - A degree of untapped potential remains in the Canadian labor market, meaning the economy may be able to generate more growth without higher inflation, the head of the Bank of Canada said on Tuesday, suggesting the central bank can take its time raising interest rates.

FILE PHOTO: Bank of Canada Governor Stephen Poloz (R) and Senior Deputy Governor Carolyn Wilkins walk to a news conference in Ottawa, Ontario, Canada, July 12, 2017. REUTERS/Chris Wattie/File Photo

Reiterating that the central bank will not take a mechanical approach to rates that will likely be higher over time, Bank of Canada Governor Stephen Poloz said policymakers cannot know in advance how far the capacity-building process can go but have an obligation to let it occur.

Economists said Poloz’s comments underscored the bank’s dovish message of caution after hiking rates three times since July and sent the Canadian dollar lower against the greenback.

The central bank, like others, is trying to lift rates off low levels without snuffing out economic growth, while navigating a number of unknowns, including the future of U.S. trade policy.

“We all know that interest rates are low and that suggests that in a more normal period they would be higher than they are today. But getting there from here is a very gradual process,” Poloz said at a news conference.

“Even I don’t know when interest rates may go up again, and that’s because we are truly dependent on the data as they evolve.”

Although the labor market has become healthier over the past year, there is still some slack, Poloz said in his speech. Increased investment by existing and new companies and more jobs turnover should create more supply in the economy through higher productivity and employment, he said.

“This sticks with their mentality that they can be gradual in raising rates,” said Josh Nye, economist at Royal Bank of Canada.

“The emphasis on the economy having more room to run without generating inflationary pressure gives it a dovish tone overall.”

Despite Canada’s low unemployment rate, a wider range of data point to “a degree of untapped supply potential in the economy,” Poloz said.

“This is important, for it means that Canada may be able to have more economic growth, a larger economy, and therefore more income per person, without generating higher inflation,” he said.

As this process involves upside and downside risks to inflation, the central bank will remain particularly data-dependent, Poloz said.

Poloz said Canada is in the “sweet spot” of the economic cycle and there was reason to be optimistic about the economy despite the uncertainties.

Reporting by David Ljunggren in Kingston, writing by Leah Schnurr and Dale Smith in Ottawa; editing by Diane Craft and Jonathan Oatis