Canadians should get accustomed to higher interest rates.
That was the message delivered by Bank of Canada Governor Stephen Poloz this week as he reiterated the need to return borrowing costs back to "neutral levels."
Governor Poloz made the comments during his semi-annual testimony before the House of Commons Finance Committee on Tuesday. They come a week after the Bank of Canada issued its fifth interest rate increase since it began tightening monetary policy in summer 2017.
Last week, Governor Poloz acknowledged for the first time in more than a decade that the central bank expects to completely remove monetary stimulus from the economy -- raising speculation the pace of rates hikes could accelerate during 2019.
Asked about dropping the word "gradual" from last week’s interest rate statement, Governor Poloz said that while the economy warrants higher interest rates, policy makers need to balance the risks of moving too slowly against moving too quickly, a process that they will need to evaluate continuously.
"It’s certainly not going to be a rapid process, it’s a process though that we wanted to make sure that we weren’t locked into a perception that we would move every second meeting, that’s what the markets said gradual meant,” said Poloz on Parliament Hill. "And we thought well, it might mean that, but it could easily not mean that, so we needed to clarify."
Faced with a series of questions about whether Canadians would be able to cope with higher interest rates, Governor Poloz said the reason he emphasized the notion of returning rates to neutral last week was to ensure Canadians could "digest" the idea "as an approaching fact."
"When I bought my first house and rates were 12% or 13% -- but that kind of goes into the rear-view mirror and now we want people to understand that 3% would be just kind of a normal thing, given the low inflation environment that we have established, and it shouldn’t feel difficult.”
In his prepared remarks to the federal government, Governor Poloz said interest rates remain stimulative despite last week’s rate increase, core inflation measures remain "firmly" around the 2% target, and financial vulnerabilities have stabilized.
