Bank of Canada stresses caution amid debt woes

Bloomberg

Bank of Canada Governor Stephen Poloz said policy caution and uncertainties around the economic outlook remain prominent in the central bank’s thinking, even as an economy running close to capacity increases the likelihood rates will eventually rise.
Poloz used his last speech of the year to highlight three subjects he called “slower-moving, nagging issues” that keep him up at night: cyber threats to the financial system, high household debt levels and labor market slack, particularly youth underemployment.
It was in the section on labor where Poloz provided the most insight on monetary policy, underscoring his belief there is slack that should be accommodated with low interest rates even if other indicators suggest borrowing costs should rise. The Bank of Canada has kept rates on hold at its last two decisions and said it will be “cautious” with future moves.
“With the economy operating near potential, a mechanical approach to policy would suggest that monetary policy should already be less stimulative,” Poloz said. “However, as we said in last week’s interest rate announcement, we still see signs of ongoing, albeit diminishing, slack in the labor market.”
At the same time — beyond the uncertainties and labor market slack — the underlying trends in the economy are largely positive and suggest interest rates will be going up over time, Poloz said.
The Canadian dollar reversed losses, rising as much as 0.8 percent after Poloz’s remarks to C$1.2714 per US dollar. The currency is down almost 5 percent since early September, when the central bank adopted a more cautious stance to policy.
“The economy has made tremendous progress over the past year, and it is close to reaching its full potential,” Poloz said. “We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time.”