BoC's Poloz: Canadian economy is still facing strong headwinds

Speaking from Québec, BoC’s Governor Stephen Poloz stated that Canada is still facing strong headwinds and the central bank should watch the full effects of the government’s stimulus unfold.

Key quotes from the speech:

Read the full speech "Living with lower for longer" at the BoC website

"It is quite evident that our economy is still facing strong headwinds, and we need stimulative monetary policy to counteract them and move us closer to full capacity. We also need to watch the full effects of the government’s fiscal stimulus unfold."

"However, the decline in the real neutral rate means that any given setting of our policy rate will be less stimulative today than it was a decade or two ago. The current policy rate, while certainly providing monetary stimulus, is not as stimulative as it would have been before the crisis."

"By the same token, an immediate rise in our policy rate back to, for example, the 4.25 per cent that prevailed before the financial crisis would represent an extreme tightening of policy and would have significant consequences. This is just another way of saying that low interest rates are actually having big effects today, but the headwinds pushing back on that stimulus remain quite powerful."

"So far, we’ve talked about the adjustments that are needed in response to powerful, slow-moving global forces. We know that these forces have reduced the real neutral interest rate here in Canada and will keep the growth of potential output around 1.5 per cent for the next number of years."

"In such a context, increasing potential output growth by even a few tenths of a percentage point would make an important difference to all the issues I have spoken about today. Raising potential output growth would boost the real neutral rate of interest and long-term interest rates, and it would increase returns on investments for savers and companies alike. So if there are policies that would boost potential output—the sum of labour force growth and productivity growth—then we need to pursue them."