'No predetermined path for interest rates from here,' Poloz says

The Bank of Canada will pay close attention to economic data to determine its interest rate policy moving forward, and won’t be sticking to any sort of script, the bank’s governor Stephen Poloz said in a speech Wednesday.

In July, the bank moved its benchmark interest rate up by a quarter of a percentage point, the first time it has hiked lending rates since 2010. It then followed that up with another rate hike earlier this month, causing many watchers to wonder if more increases were in the offing.

But the bank won’t stick to any script in terms of setting its policies, and as always will respond to developments as they happen.

“There is no predetermined path for interest rates from here,” Poloz said in a speech in St. John’s.

“Monetary policy will be particularly data dependent in these circumstances and, as always, we could still be surprised in either direction.”

Market watchers currently think there’s about a one-in-three chance of another rate hike next month, Bloomberg data indicate. But Poloz’s first public comments since July seem designed to spread the message that the bank won’t stick to any predetermined path and will instead react to information as it comes in.

The loonie lost about half a cent to drop as low as 80.45 cents US on Wednesday after the text of Poloz’s speech came out. That’s a sign that currency traders think more hikes are less likely.

Just as expected

In 2015, the bank shocked many by cutting its benchmark interest rate in reaction to the collapse in oil prices. The bank’s models correctly predicted that move would have an impact on the economy, even if it took a while.

Although criticized by some at the time, Poloz said the move to cut rates to all time lows helped the economy just as it was expected to.

“We estimate that if we had not lowered our policy rate in 2015, the economy would be roughly 2 per cent smaller today — a difference of almost $50 billion — and there would be about 120,000 fewer jobs.”

Poloz said interest rate changes don’t tend to leave their full imprint on inflation for about 1½ to two years, a trend he expects to continue this time around after two rate hikes.

“When we make our monetary policy decisions, we are less concerned about the latest inflation numbers — which are already a month old — than we are about where inflation will be in the future,” Poloz said.

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