Interest rates will stay lower for longer, and businesses need to adjust expectations for return on investment or Canada’s economy risks not seeing the improvement in productivity needed for growth, Bank of Canada Governor Stephen Poloz said on Tuesday. “This is about much more than monetary policy”.
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In a speech to the Association des économistes québécois, the Cercle finance du Québec and CFA Québec, Governor Poloz talked about the need for companies and households to adjust to the reality of interest rates that are likely to remain at low levels for a long time.
“In a lower-for-longer world, these are opportunities we simply can not afford to miss”, he said.
An economist at TD Bank said he was inclined to agree with Poloz’s statements on altering retirement planning.
Lower-for-longer interest rates have made it more hard for Canadians to finance their retirement through savings, the Governor noted.
“In a low-growth world, these three initiatives taken together could have a significant impact on economic growth, year after year”, he said. “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”.
“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”, he said in his prepared remarks.
Mr. Poloz, speaking at a news conference in Quebec City, acknowledged that Canada’s export growth has faltered in recent months compared with the central bank’s expectations. Canada’s resource-reliant economy was hit hard by the oil price rout that began in 2014, and policy makers had hoped a weaker currency would boost manufacturing and trade.
If growth doesn’t pick up during the second half of this year, as the central bank expects it will, “further easing in 2017 is possible”, Mr. Reitzes said in a note to clients.
“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 The country will continue to be in an era of low rates even after stimulus is eventually withdrawn, he said. This translates into a nominal neutral range of 2.75-3.75% compared with a range of around 4.50-5.50% before the financial crisis.
At the same time, Poloz stressed in his speech the need for greater trade liberalization, both in Canada and elsewhere, “since the world seems to be entering a phase of doubt about the benefits of global trade”.
Mr. Poloz also stated that the panacea to a slow-growth future is to raise spending on infrastructure and open borders – both within Canada and internationally – through deals such as the Trans Pacific Partnership (TPP) and the Canada-Europe free-trade agreement.
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“Individuals need to plan for retirement with different assumptions about longevity, interest rates, and growth”, he adds.
