Five Key Quotes From Bank of Canada’s Poloz In The Past Week

December 02, 2016

Frances Donald, Senior Economist, Manulife Asset Management

Bank of Canada (BoC) Governor Stephen Poloz has kept busy this week. On Monday alone, he gave an interview to Bloomberg Canada, delivered a speech at the CD Howe Institute, answered a lengthy audience Q&A and then gave a press conference. Our Senior Economist Frances Donald identifies five key quotes from Mr. Poloz that she believes reveal the main narrative that dominates thinking at the central bank.

It has been a busy week for Governor Poloz, who chose to front-load his week with a series of external activities. I was among the lucky few to listen to his speech at the CD Howe Institute and participate in the Q&A session. Here are what I consider to be the five most important comments from him over the past week. Taken together, they add to our conviction that the Bank of Canada is on a prolonged hold, and that the bar to an interest rate cut remains quite high.

1. “We will get home by the middle of 2018 and that’s okay1.”

Translation: The BoC sees itself on track to achieve its mandate without further policy tinkering (for now).

Governor Poloz repeatedly commented on Monday that he expected inflation to reach 2% by 2018 and, similarly, that the output-gap would close by mid-2018. To him, that is a “reasonable” timeline. In the context of limited bullets, it implies that the BoC can achieve its mandate without further accommodation, but also suggests an interest rate hike would be inappropriate before 2019. In short, this comment taken alone suggests a long pause from the Bank of Canada.

“A significant departure in that outlook2” means “something like the oil price shock so that you are clearly knocked off target.”

Translation: The bar to a rate cut is very high (but not insurmountable).

Six weeks ago, Governor Poloz remarked that the Governing Council had actively discussed an interest rate cut at its most recent meeting3. On Monday afternoon, while being interviewed by Bloomberg, he made a contrasting comment in which he suggested that it would actually take a “significant departure” from the current outlook to lower interest rates. He then repeatedly qualified a “significant departure” throughout the day as an oil price shock akin to 2014-20152. Given the magnitude of that shock, I think that comment taken alone would suggest a very high bar to an interest rate cut.

But what could qualify as a “significant departure” of that magnitude? In my opinion, a hard landing in Ontario and British Columbia housing markets and/or a significant trade disruption with the United States could also qualify as “significant departure” shocks. Critically, both of these downside risks have a non-zero probability of materializing in 2017-2018, though neither is our current expectation. This is one reason why our base case remains a hold, but with asymmetric risk towards a cut in the coming two years.

3. “We only incorporate actually announced policy changes, and there haven’t been any of those2.”

Translation: Do not expect the BoC to react to NAFTA risk4 at their next few meetings (but expect Canadian-US trade relations to remain the elephant in the room).

Governor Poloz shut down several questions throughout the day about President-elect Trump’s impact on Canada by repeating, in various formulations, that the Bank of Canada cannot and will not incorporate “hypotheticals” into its outlook. The result may be that markets will shave off some optimism from Governor Poloz’s outlook given that it apparently doesn’t incorporate this sizeable downside risk. He did, however, emphasize that uncertainties about the outcome of trade relationships can be damaging and have already contributed to some weakness in 2016. So, the idea that the “Trump trade” is completely absent from the BoC’s analysis is probably erroneous, despite Governor Poloz's comments.

4. “We know the infrastructure spending is barely getting into a starting point2

Translation: There are upsides to growth on the horizon.

The coming infrastructure spending buys the Bank of Canada time. As I’ve written before, cutting rates when you have upsides to the economy via another policy arm would be premature in the context of limited bullets5. This coming stimulus also allows the Bank of Canada to look through weaker economic data over the coming six months to a year.

5. “I gave a speech at the very beginning of the year saying that we had all of the ingredients of a divergence in monetary policies, and I think that those conditions remain intact.”

Translation: The economies are decoupled, so monetary policy will be too.

I could have chosen a generic housing comment from Governor Poloz as the #5 key comment, but instead I would like to emphasize a critical Canadian monetary policy narrative: we may see a relatively significant divergence between US and Canadian monetary policy over the coming years as the Bank of Canada meaningfully lags the Federal Reserve’s normalization process. This is in part driven by the structural divergence in economic activity created by the oil price shock (Governor Poloz noted on Monday that if we hadn’t had the oil price shock, the Canadian and US economies would be in more similar situations) along with decoupled housing markets, but it is also due to the potential divergence in inflationary dynamics. I would add that Governor Poloz seems particularly committed to the concept of independent monetary policy.

The one quote that shouldn’t matter but will get the most headlines

I would seriously downplay the headlines that are reading “Bank of Canada’s Poloz prepared to use unconventional measures if necessary1”. The comment addressing unconventional measures came from a late-in-the-game Q&A, and was not part of the Governor’s prepared remarks. The Bank of Canada’s references to unconventional measures have almost always been in theoretical terms and as part of every central bank’s responsibility to understand these tools and their implications. Of course he would be obligated to say the Bank would pursue these policies if needed, but I would not interpret his comments on Monday or over the past year to imply that the Bank of Canada intends to implement unconventional measures. Governor Poloz also appeared to be downplaying unconventional measures at his later press conference in an effort to emphasize that unconventional tools are part of general research and not the intended path of rates.

1 Governor Poloz’s quotes are from his appearance at the CD Howe Institute on November 28, 2016 and noted where lifted from other sources
2 Bloomberg: Poloz Sees Heightened Uncertainty In Canada After Trump Win, November 28, 2016
3 Financial Post: Bank of Canada Was Close To Cutting Interest Rate Wednesday, Stephen Poloz Reveals, October 19, 2016
4 US President-elect Trump has previously said he would push to amend NAFTA, and withdraw from the agreement if necessary
5 Manulife Asset Management: The Bank of Canada Has Opened the Rate-Cut Door, But They Won’t Walk Through It, October 27, 2016
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The opinions expressed are those of Manulife Asset Management™ at the time of publication, and are subject to change based on market and other conditions. The information in this article including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Asset Management disclaims any responsibility to update such information. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife Financial, Manulife Asset Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Manulife Asset Management to any person to buy or sell any security and is no indication of trading intent in any fund or account managed by Manulife Asset Management.

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