January 17, 2018 / 6:19 PM / a year ago

RPT-HIGHLIGHTS-Bank of Canada's Poloz and Wilkins speak after rate hike

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TORONTO, Jan 17 (Reuters) - Below are some key quotes from a news conference by Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins on Wednesday after the central bank raised interest rates to 1.25 percent.

POLOZ ON NAFTA RISK

“For us, it is not a matter of a binary event. We simply don’t know enough about the potential consequences of a substantial change to NAFTA to be able to pre-calculate what policy should do.

“With NAFTA, it’s more a case of ambiguous consequences, we’ve already got part of it modeled in so we’ll continue to watch that unfold, investment decisions in particular, and on the trade front we would monitor it and see how the fallout on the economy unfolded, and that would mean fine-tuning that policy deliberation process in real time, not doing a fancy scenario exercise in advance and having it all figured out.”

“And so you will need the benefit of time and data to understand this as it unfolds, and so markets should not think of it as a binary event, and I’m hopefully they appreciate the conversation we just had

POLOZ ON POLICY DEBATE

“We didn’t walk into this as if it was a no-brainer that it was time to move rates, there was a good debate around that. It’s not that we were arguing, but we were debating the pros and cons.

“Perhaps the one we knew the least about was the one you just talked about, which was the role of debt and how sensitive is the economy to higher interest rates. It takes more time to get a reading on that, especially given that people to some degree appear to be pulling forward their house purchases in order to execute their mortgages in advance of the new rules.

“Once that settles out then we’ll get a better read on that issue, and as Carolyn just mentioned at least credit growth has moderated a little so it shows the interest rates are beginning to affect some decisions.

“The big cloud over the forecast as well as our discussion is NAFTA, how immediate, how big, lots of debate around that. And so given those uncertainties of course the possibility of not moving at this time was in the air. But at the same time, we say we are and we are data dependent, and there’s no question that the data on balance since October have been stronger than our base case. Not every data point, but on balance.

“Given that, and given the string of positive surprises has encourage us in the underlying narrative, feeling more confident in that outlook. It’s not like we’re changing a lot of numbers, but it just feels better, higher quality.

“I won’t comment on whether the market reacted or slower than that, I just find it on balance reassuring to know that the market reads the data similar to what we do.

POLOZ ON NAFTA WITHDRAWAL AND ITS IMPACT ON EXPORTS

“I don’t see it as a binary event ... I believe it would be net negative for both Canada and the United States but to actually quantify that is very difficult because every sector is affected differently, it goes from firm to firm in fact as to how they would choose their strategy around that.”

POLOZ ON TRADE CONTINUING WITHOUT NAFTA

“Trade would go on. It would be changed in some ways ... I think there is a lot of investment in the current trade structure and it may be a very slow process, and that’s what we think as a supply shock to the economy.”

POLOZ ON NAFTA RISK

“For us, it is not a matter of a binary event. We simply don’t know enough about the potential consequences of a substantial change to NAFTA to be able to pre-calculate what policy should do.

“With NAFTA, it’s more a case of ambiguous consequences, we’ve already got part of it modeled in so we’ll continue to watch that unfold, investment decisions in particular, and on the trade front we would monitor it and see how the fallout on the economy unfolded, and that would mean fine-tuning that policy deliberation process in real time, not doing a fancy scenario exercise in advance and having it all figured out.”

“And so you will need the benefit of time and data to understand this as it unfolds, and so markets should not think of it as a binary event, and I’m hopefully they appreciate the conversation we just had.”

WILKINS ON HOUSEHOLD DEBT

“There’s one thing that you didn’t mention, maybe because it was so obvious, and that’s really household debt that’s keeping me up at night.”

“It’s a vulnerability that we would face if we had a shock. There’s plenty of reason to think that continued growth, the changes in macro-prudential policies that we’ve put in place will improve underwriting standards and the quality of debt and the interest rate increases that we have will slow credit growth.”

“Those things are all pointing in the right direction, but until we get there I think that does leave us more vulnerable than we would have been otherwise to bad things happening.”

POLOZ ON WHETHER POLICY MORE CLOSELY TIED TO U.S. FED NOW THAT ECONOMIES ARE MORE IN SYNC

“The short answer is no ... the big divergence between our economies was during the oil price shock, the terms of trade shock that we came through.”

POLOZ ON TRADE CONTINUING WITHOUT NAFTA

“Trade would go on. It would be changed in some ways ... I think there is a lot of investment in the current trade structure and it may be a very slow process, and that’s what we think as a supply shock to the economy.”

POLOZ ON IMPACT ON INVESTMENT IF NAFTA SCRAPPED

“The channel which seems most immediate, the most likely to be observed, is this investment channel ... that means that is actually happening today, that’s what’s being postponed or diverted to the United States and that sort of effect could be bigger, in a binary sense, if an announcement is made that NAFTA is no longer to be.”

POLOZ ON NAFTA AND CONSUMER PRICES

“I think on the first part of your question (on implications of end of NAFTA on consumer prices) is pretty unambiguous that consumer pricing goes up. Any model I can think of would tell us that.

POLOZ ON ECONOMIC STRENGTH AND MONETARY POLICY

“Everybody is better off with a stronger economy. A stronger economy means interest rates can move a little closer to something more normal in a context in which everybody is better off.”

POLOZ ON FISCAL POLICY

“You know I’m not going to comment on the government’s plans or their actual fiscal policy, but I would remind you that we would still have a sizable output gap in the economy were it not for the fiscal actions that have been taken over these last two years. Some were in the order of 0.5 of a percentage point, which is significant. It is that fiscal expansion which has helped bring us to this point where we can have a healthier profile for interest rates than we had when they were rock-bottom.”

POLOZ ON ABILITY TO WITHSTAND SHOCKS

“I know that there’s one school of thought out there that expansions die of old age but I think, in fact, very few of them ever have. They die because something else comes along to disturb things and one of them is inflation factors for example.

“We need to be prepared for a new shock and one of the things that we’ve talked about a lot in the context of the FSR (Financial System Review) is that our vulnerability to such shocks has grown through this cycle.

“When we did the renewal through the 2 percent inflation target we thought about whether we had sufficient room to maneuver in future business cycles.

“Today we have more room to maneuver in that respect than we did a year ago which is good and I think with the economy in such good health as it is we can be confident that we continue to build on that.”

POLOZ ON WAGE GROWTH

“That common measure suggests that wages are running at around 2.2 percent..which is roughly in line with inflation. So it suggests you have no real wage growth yet, despite the fact that actually productivity has been doing reasonably well.”

“Productivity has actually been pretty positive on average through this and that suggests therefore that there’s room in there for wages to continue to gather more momentum.”

POLOZ ON WHAT THE BANK MEANS BY “SOME” ACCOMMODATION

“Some means the same as it means in every day language, it just means “some.” And we use the word some because, frankly, we can’t be precise about it and we wouldn’t be precise given all the unknowns that we face anyway.”

POLOZ ON THE NEUTRAL RATE OF INTEREST

“If the economy were completely back to normal and all the forces acting on it had dissipated, arguably somewhere in the neutral rate zone is where interest rates would end up. But there is a number of things still acting on the economy which mean that it is going to be some time before we can get there and throughout that period some accommodation will still be required in order to offset those things.”

POLOZ ON EXPORTS

“Although exports are in an uptrend and have been for some time, we know, given what we have been through over the last three years or so, that exports in level terms are well below where they would have been where our models told us before all this. We trace that back to capacity that exited the market place, we did a lot of analysis on those things, and a trend loss of competitiveness.”

POLOZ ON NAFTA

“In terms of NAFTA, it’s a very big unknown for us. It’s not just unknown what is happening but it’s unknown what it will look like and how its effects will work their way through the various channels.”

“So there’s no unambiguous pre-calculation one can do about how it will affect the economy, it’s more a case of being prepared, to know which dynamics to watch for and to be able to respond in real-time in an appropriate way.

POLOZ ON DATA DEPENDENCE

“We remain fully data-dependant, for the reasons we’ve described before. It is this list of issues which are important unknowns at this particular juncture, nothing mechanical is appropriate at this stage. So data dependence is illustrated very aptly today, I would say. You saw the flow of good data coming the last few months and certainly since last September, October. And you saw those data make their way through the marketplace, the markets embrace the positive data, longer-term yields gradually edged their way higher. And today you get a rate hike which basically validates what you’ve seen in the marketplace.” (Reporting by Alastair Sharp, Fergal Smith, Matt Scuffham; Editing by Denny Thomas)

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