Poloz hints at removal of low-rate stimulus

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The country is returning to “natural economic growth,” Stephen Poloz, governor of the Bank of Canada, told a conference at the Vancouver Board and Trade Wednesday, hinting at the eventual removal of low-rate stimulus.

“I anticipate that the Canadian economy will normalize and growth will become natural, in contrast to the economic activity of the past six years, which has been fuelled by policy, including record-low interest rates,” Poloz said. “Natural growth will be self-generating and self-sustaining, and the economy will be growing at its potential, as its productive capacity expands.”

Earlier this month, the Bank of Canada announced it will hold the overnight target interest rate at 1 per cent – extending the three-year trend of low prime interest rates – and expects it to remain there until 2015.

At the time, Poloz intimated that the overnight will remain steady until the market normalizes.

“As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate,” he said earlier this month. “Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected, consistent with achieving the two per cent inflation target.”

And Poloz believes that normalization, according to his statements Wednesday, may be on the horizon.

“Inflation will be back to our target of 2 per cent (and) as I have said before, policy rates in Canada will be higher than they are today,” he continued. “We can expect that short-term interest rates, as is normal, will be above inflation (and) long-term rates will settle into place along a natural, upward-sloping yield curve.”

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