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Low Interest Rates the New Normal: PolozFriday, April 25, 2014 > 09:10:25
Canadians can expect to enjoy relatively cheap borrowing costs for some time to come – perhaps years – even after the economy returns to full capacity and the Bank of Canada starts hiking interest rates, bank governor Stephen Poloz said Thursday.
The central banker told a luncheon in Saskatoon that the economy has room to grow before it can be considered to be firing on all cylinders, but even when it does – likely sometime in early 2016 – Canadians shouldn't expect a sudden increase in interest rates to fight inflation. Because of the aging workforce and particularly because rates have been at super-low levels for years, modest increases will likely be sufficient to achieve the bank's goal of keeping inflation in check.
"Our economy has room to grow, and when we do get home, there is a growing consensus that interest rates will still be lower than we were accustomed to in the past," Poloz said. "Both because of our shifting demographics and because after such a long period at such unusually low levels, interest rates won't need to move as much to have the same impact on the economy."
The statement represents a slight shift of tone for the central bank, which has for years warned households not to overextend themselves in the housing market because one day interest rates will need to start rising. Poloz reiterated his belief Thursday that the risks of a housing bubble were subsiding, saying that "we have what looks like a soft landing emerging in housing."
The Bank of Canada has kept the overnight rate, which impacts short-term borrowing costs, at 1% since September 2010, but in essence, rates have been well below so-called normal levels dating to early 2008. Some economists speculate the new normal in the bank's overnight rate will settle in at the 2.25 to 2.5% range, more than a full point or more below pre-recession levels.
The super-low borrowing costs are generally acknowledged to have aided the economy through the 2008-09 crisis and soft recovery – stimulating borrowing and spending among Canadians and businesses – but not without costs, including an overheated housing market and record-high levels of household debt. As well, it has been a difficult six years for savers, who have seen low yields on investments, and it has made it tough for defined-benefit pension plans to cover their liabilities.
In the past, Poloz has hinted that he might have been prepared to cut rates further in an effort to stimulate economic growth if not for fear of encouraging even more borrowing, particularly in the housing market.
Poloz's speech to the Saskatchewan Trade and Export Partnership touched only briefly on interest rates, as the central banker focused on the controversial subject of Canada's oil exports and their impact on the dollar and central Canada's manufacturing sector.
Poloz conceded that the strength of resource exports had played a role in the appreciation of the loonie over the past decade. However, while resource-rich regions of the country have benefited the most, all Canadians have shared in the "gift," he said. He said the bank's research has calculated that Canada's gross domestic income is about 7% higher today than it would have been without the improvement in terms of trade brought on by resource exports, particularly oil, since 2002.
"Yes, when we break this down by region, big benefits are accruing to the three oilproducing provinces (Alberta, Saskatchewan and Newfoundland). But those who suspect GDI (gross domestic income) is falling elsewhere will have to think again," he said. "Rather, everywhere in Canada, GDI is higher than it would have been without the improvement in our terms of trade."
The analysis is similar to one put forward by Poloz's predecessor, current Bank of England governor Mark Carney, when he undercut NDP Leader Thomas Mulcair's complaint that the appreciation of the loonie, triggered by the oil boom, was hollowing out Ontario's manufacturing base, or causing a sort of Dutch disease phenomenon in Canada.
Poloz did not deny there was an element of truth to the Dutch disease scenario, but said other factors were at play, including the unrelated weakness in the U.S. currency and the recession, which was particularly hard on manufacturers. He said he was encouraged that the manufacturers that have survived are adjusting to the new reality and will prosper.
"With Canada's stronger terms of trade, with our healthy business environment, with our ability to innovate, the future of Canada's manufacturing sector is bright," he said.