Bank of Canada sees economy improving, plays down inflation risk

By Fergal Smith and Andrea Hopkins

OTTAWA (Reuters) – Bank of Canada Governor Stephen Poloz on Monday gave an upbeat assessment of the economy’s prospects after a sluggish first quarter and said that while inflation this year would rise above the central bank’s target, it would be temporary.

Poloz, in testimony to the House of Commons’ Finance Committee, reiterated that while higher interest rates would likely be warranted over time, some policy accommodation is still required to keep inflation on track.

Pointing to the bank’s outlook for inflation of 2 percent two years from now, Poloz said policymakers are confident they have the right modeling and framework to guide interest rate decisions.

“Given what our outlook is, we’ve got monetary conditions roughly where they should be, and in that context, the fact that inflation is rising above 2 (percent) for now is due to temporary factors and we can see through them,” he told the committee.

The central bank held rates steady last week at 1.25 percent after hiking three times since last July, but said more interest rate hikes would be coming amid rising wage growth and inflation. Financial markets expect one or two more rate hikes this year from the bank .

Poloz said policymakers are watching wages, which he said will pick up as job vacancies continue to grow, and will in turn encourage more people to enter the workforce.

“We are just now in the last six months reaching wage movements that are actually positive in real terms, above 2 percent. And so that’s a really important bridge to cross and when we get up to the 2.5-to-3-percent zone, then we have got more scope for getting faster reintegration of people back into the workforce,” he said.

Poloz reiterated his expectation that business investment and export growth will soon contribute more to economic growth, which has until now mostly been driven by households and government spending.

“I am hopeful that when we get past the bottlenecks that we saw during in the winter time, that we’ll get some clearing of inventory out and exports will rebound,” he said.

The Canadian dollar, which hit a near three-week low on Monday at C$1.2858, steadied around C$1.2845 after Poloz’s remarks.

Poloz over the weekend said he expects the inflation rate to be above the central bank’s two percent target in 2018, but he is comfortable with that as long as the long-term trend is steady, according to media reports published on Sunday.

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