Bank of Canada governor Stephen Poloz has said that despite last week’s hold decision, interest rates would still need to rise as soon as the downward pressure hampering economic growth eases.
The current 1.75% policy rate is a crucial ingredient in sustaining recovery at the moment, amid factors such as trade tensions hindering investments. Indeed, earlier this year, Poloz asserted that the Canadian economy will still benefit from the boost offered by low borrowing costs can provide.
Taking into account inflation of approximately 2%, the current rate has actually placed borrowing costs at negative, he added.
Last month, the bank estimated the neutral rate as somewhere between 2.25% and 3.25%.
“It is hard to believe that the economy would settle in in a place where it’s growing at potential, and inflation’s on target, and we have unemployment at a 40-year low, and that we’d need a negative real rate of interest in order to sustain that,” the governor told BNN Bloomberg.
“What we need to see is that those headwinds dissipate, and if those headwinds dissipate, then interest rates would rise.”
In a late March speech, Poloz assured that Canada is in a good place to overcome the short-term slowdown, as shown by the fundamentals. January’s GDP growth surpassed expectations with a 0.3% rate.
“There are challenges in the Canadian and global economies that we need to manage, but there are clear signs that Canada is adjusting to the challenges,” Poloz said. “Recent economic data have been generally consistent with our expectation that the period of below-potential growth will prove to be temporary.”