Bank of Canada increasingly sure economy will need less stimulus

TORONTO, (Reuters) – The Bank of Canada is growing increasingly confident that the economy will need less stimulus over time, Governor Stephen Poloz said on Thursday, adding that the economy is in a sweet spot after making “tremendous” progress over the last year.

In a year-end speech, Poloz said current monetary policy “clearly remains quite stimulative” despite two interest rate hikes earlier in the year, adding that the economy is close to reaching its full potential.

“We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time,” Poloz said in prepared notes for a speech to the Canadian Club in Toronto.

While a mechanical approach to setting policy would suggest rates should already be higher, the bank still sees signs of ongoing but diminishing slack in the labor market, Poloz said.

Canada’s economy is near capacity and growth is forecast to continue above potential, posing an upside risk to the inflation forecast, he said. At the same time, labor market slack poses a downside risk.

“Given the unusual factors at play, the bank is monitoring these risks in real time – the term we use for this is ‘data dependent’ – rather than taking a mechanical approach to policy setting,” Poloz said.

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