By Richard Woodbury
HALIFAX, March 18 It is unlikely that bad
weather has been entirely to blame for recent economic weakness
in Canada, central bank Governor Stephen Poloz said on Tuesday
as he warned about the risk of a prolonged period of sluggish
growth and low interest rates.
In a speech viewed by analysts as slightly dovish, Poloz
confirmed what many have already forecast for the near term:
first-quarter growth will be softer than the 2.5 percent
annualized rate the Bank of Canada forecast a few weeks ago, and
inflation will soften in February after two reassuring months of
But it was Poloz's longer-term outlook that grabbed the
market's attention. While he sees Canada's economy growing by
about 2.5 percent a year over the next two years, it is likely
to expand by only around 2 percent a year beyond that, he said.
The sluggishness globally and in Canada will not be just due
to the lingering effects of the financial crisis, Poloz said. He
said demographics will also play a role, particularly the
retirement of baby boomers and the preference they have shown
for putting savings into real estate rather than productive
assets like stocks.
"The demographic forces that are in play suggest that the
growth trajectory that we converge on after the recovery period
will be slower than our historical trend, and it will also be
associated with lower equilibrium rates of interest," he said of
Canada in the speech.
He added that the risk of "secular stagnation" needs to be
taken seriously, and that low investment and high savings could
mean that interest rates stay low for longer and that even
ultra-low policy rates might not provide as much stimulus as
they have in the past.
Scotiabank economists Derek Holt and Dov Zigler said the
comments reinforced their view that the Bank of Canada will keep
its main policy rate at the current 1.0 percent until the fourth
quarter of 2015 or later.
"This longer-run guidance is material to a low-for-long
dovish Bank of Canada bias beyond the printed forecast," the
Scotiabank economists wrote in a research note, referring to
bank forecasts extending to the end of 2015.
When asked whether he could rule out a rate cut, Poloz
replied: "No, I cannot," saying the bank's stance was neutral,
which meant it was weighing the risk of disinflation on one hand
against excessive household debt on the other.
"If the balance of risks were to shift so that the risks to
the downside on inflation were increased, then we would need to
reconsider that balance of risks and our position on it," Poloz
The median forecast in a Reuters poll in late February was
for the bank's first move, a hike, to come in the third quarter
of next year.
"The key takeaway is that the long-term growth trend is
going to be weaker than the pre-crisis experience," said
Benjamin Reitzes, senior economist at BMO Capital Markets.
The Canadian dollar weakened immediately after Poloz's
comments to C$1.1090 to the U.S. dollar, or 90.17 U.S. cents. It
later slid further to C$1.1131, or 89.84 U.S. cents.
SOFT FIRST-QUARTER GROWTH
For the more immediate future, Poloz said first-quarter
economic growth and February inflation would both be softer than
in the previous quarter and month.
"What we have seen is that the numbers in the first quarter
have been a little shy of what we were expecting," he said.
"It's easy to point to the weather as a qualitative explainer,
but it is hard for us to believe that all of that is just that,"
Excluding the effects of the severe weather that hit Canada
and the United States in December and January, he said growth
was probably only marginally lower than forecast. "We don't
really think the story has changed."
In its January report, the central bank projected 2.5
percent annualized growth in the first quarter, down from 2.9
percent in the fourth quarter.
As for inflation, which has stayed below the bank's 2
percent target for nearly two years, most analysts expect data
on Friday to show softer inflation in February, compared with
February 2013, when there was a sharp rise in prices. Inflation
had jumped to 1.5 percent in January 2014.
"Looking through the short-term volatility, inflation still
seems to be running at around 1.2 percent, give or take a tenth
or two," Poloz said.
BMO's Reitzes said it was unlikely the central bank would
react to the weaker growth and inflation outlook by easing
interest rates because Poloz emphasized the weakness was