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Canada Rates Won't Move in Lockstep With Fed, Says Bank of Canada's Poloz

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02/01/2017 | 03:03am CEST
By Paul Vieira 

The Canadian economy is "some ways behind" the performance in the U.S., so the two countries' rate policies will continue to diverge for the foreseeable future, Bank of Canada Gov. Stephen Poloz said Tuesday.

"Do not expect to see Canada following the U.S. at this stage in terms" of rate increases, Mr. Poloz said at a press conference, following a speech in Edmonton, Alberta, that focused on economic modeling.

The remarks reinforce a belief in the forecasting community that the Bank of Canada will be on hold through this year and possibly well into 2018, as the economy gradually recovers from the income shock fueled by the commodity-price slump. In contrast, the Federal Reserve anticipates three increases in its benchmark policy rate this year.

Mr. Poloz said the Canadian economy was on track toward hitting full capacity "and then the oil shock came along. That set us back for two, three years." That prompted the Bank of Canada to cut rates twice in 2015, down to 0.5%. The central bank could cut rates again, Mr. Poloz said, if there's "a significant delay in getting the economy back to full capacity and inflation on target." The Bank of Canada forecasts a return to full capacity in mid-2018.

The key takeaway from Mr. Poloz's post-speech remarks is that higher rates "are not warranted," said Brian DePratto, economist at TD Bank. "Ultimately, Poloz's messaging continues to reinforce the risk of further monetary easing in Canada."

Earlier in January, the head of Canada's central bank said further easing is an option amid uncertainty over U.S. trade policy under President Donald Trump. Mr. Trump has vowed to renegotiate the terms under North American Free Trade Agreement, which he said has been a "disaster" for the U.S.

Skittishness over trade policy means economic uncertainty has climbed, Mr. Poloz told the Edmonton audience, and that could ultimately affect companies' capital-spending plans.

A recent survey of Canadian firms indicated increased enthusiasm toward capital spending. But given the possibility of trade-policy changes under Mr. Trump, "we are not sure if that means companies are ready to invest, or invest in Canada or invest in the U.S. It's very unclear," Mr. Poloz said.

He added the strength in the U.S. dollar has proved to be an "important headwind" to Canadian growth. Other countries' currencies have weakened against U.S. currency, whereas the Canadian dollar has remained steady -- putting Canadian exporters at a disadvantage versus other trading-nation rivals, like Mexico.

In his speech, he said the 2008-09 financial crisis exposed flaws in economic models -- such as an inability to capture links between the financial system and economy -- and these need to be corrected in building the next generation of forecasting tools.

Write to Paul Vieira at paul.vieira@wsj.com

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