Bank of Canada Governor Stephen Poloz said before the House of Commons Standing Committee on Finance Tuesday that Canada is at a “crucial” spot in its economic cycle and faces a number of significant uncertainties going into 2018.
“We are at a crucial spot in the economic cycle, and significant uncertainties are clouding the way forward,” the central bank governor told parliamentarians on Halloween night.
Governor Poloz’s comments reinforced the dovish tone that he has adopted since the Bank of Canada announced last week that it is holding interest rates steady following two previous rate increases in July and September.
On Parliament Hill, Governor Poloz repeated that the economy was likely to require less monetary stimulus over time but policymakers would be “cautious” in adjusting rates in the future. Canada’s economic growth is expected to slow next year after what is shaping up to be a strong 2017.
Governor Poloz highlighted the main sources of uncertainty for the central bank, including soft inflation and wage growth, as well as high household debt levels. Data earlier Tuesday bolstered expectations that the central bank will pause in raising rates for now, with the Canadian economy unexpectedly shrinking in August. Markets now see only a 21.3% likelihood that the Bank of Canada will hike interest rates at its next meeting on December 6th.
Governor Poloz told lawmakers that elevated levels of household debt represent an ongoing vulnerability to the economy. He said the central bank is watching to see how households absorb the higher borrowing costs already in the system. Higher interest rates can affect borrowers differently depending on whether they have a variable or fixed-rate mortgage, said Senior Deputy Governor Carolyn Wilkins, who also appeared before the parliamentary committee.
Canada has had a robust housing market in the years since the global financial crisis, largely due to low interest rates and rising concerns consumers have taken on too much debt. Canada’s housing markets still show signs of overvaluation, Canada Mortgage and Housing Corporation said last week, though it forecast a slowdown in sales and price gains over the next two years.