After two consecutive interest-rate rises, the Bank of Canada will work from a clean slate when making rate decisions as it contends with an uncertain outlook for inflation, Gov. Stephen Poloz said Wednesday.
The biggest challenge for the central bank is managing an economy that is quickly approaching full capacity while inflation remains well below its target of 2%, Mr. Poloz said in a speech in St. John's, Newfoundland.
At a minimum, Mr. Poloz said, the two rate cuts it delivered in 2015 amid the oil-price shock were no longer needed. After increases in July and September on stronger-than-expected economic growth, the Bank of Canada's benchmark rate stands at 1%.
"But there is no predetermined path for interest rates from here," the governor said. "The appropriate path for interest rates in [Canada's situation] is very difficult to know, because there are a number of important unknowns around the inflation outlook."
The speech from Mr. Poloz, his first in more than four months, marks the second time in as many weeks senior central-bank officials attempted to manage expectations on the rate-policy front after a shift toward policy tightening. Last week, Bank of Canada deputy governor Timothy Lane said the central bank wanted to gauge the economy's response to steeper borrowing costs and a stronger Canadian currency when making rate decisions.
Following September's move, Canadian market watchers indicated the central bank was setting the stage for another increase this year and more in 2018, putting the policy rate at or close to 2%. That forecast was based on commentary in a Bank of Canada statement that said growth was "more broadly based and self-sustaining," and that warranted "the removal of some of the considerable monetary policy stimulus" in the Canadian financial system.
Economists at CIBC World Markets said Mr. Poloz's remarks signal the Bank of Canada plans a more cautious approach on rate rises relative to what many anticipated. "The majority of the speech confirms our assumptions that tightening from the Bank of Canada will be a gradual affair from here," the firm said, adding it doesn't expect another rate rise until 2018.
The central bank sets interest-rate policy to achieve and maintain 2% inflation, or the midpoint of its 1% to 3% target band. But inflation has remained mostly in the bottom half of the target band in the past year, even though Canada's economy roared to become tops in the Group of Seven. The latest report indicated Canada's annual inflation rate accelerated in August to 1.4%, or a four-month high.
Economic growth will continue but at a much slower pace in the second half of 2017, Mr. Poloz said. On an annualized basis, Canada's output advanced 3.7% and 4.5%, respectively, in the first and second quarters of the year. A string of data in July suggested the economy hit a rough patch, although gross domestic product in the month is expected to edge upward, according to early estimates from economists.
Mr. Poloz said temporary factors holding down inflation should dissipate in the months ahead, and downward pressures on prices are expected to shift to upward pressures as spare capacity is fully absorbed. He warned, though, a number of factors cloud the inflation forecast, and therefore require a different approach to judging rate policy. These factors include the impact of technology, especially in driving down prices in the retail sector; slower wage growth; and what impact rate rises will have on the record levels of Canadian household debt.
"We need to keep updating our understanding of the economy in real time, " Mr. Poloz said. "That is why we say that the outlook for inflation, and therefore monetary policy, is particularly data-dependent right now."
Write to Paul Vieira at email@example.com
(END) Dow Jones Newswires
September 27, 2017 12:44 ET (16:44 GMT)