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Stephen Poloz Disagrees with Finance Minister

We often wish that we could be a fly on the wall at the Bank of Canada and listen to what BoC Governor Stephen Poloz has to say about Finance Minister Jim Flaherty, or vice versa. The relationship between these two is a delicate one, and one that must balance the good of the Canadian economy along with their own agenda and what they need to do. In addition to that, they also need to work together to determine if mortgage rules need to be tightened to curb debt and the housing market; or if the overnight lending rate needs to be raised in order to accomplish the same thing. And often, as we now hear from Stephen Poloz, they disagree.

It was on Tuesday that Stephen Poloz spoke to CBC’s The Lang and O’Leary Exchange. There he spoke about the overnight lending rate, and how now is not the time to be raising it.

“If the U.S. economy is strengthening as we believe, those will be very welcome kinds of market pressures but it’ll still be up to us what our monitored policy should be, independently of what’s going on in the U.S. and that will depend on where is inflation relative to where we expect it to be,” Poloz said. “Right now it’s expected to be too low for too long so that’s where we sit.”

And as for Flaherty’s remarks that the rate needs to be increased due to pressure from global organizations such as OECD and IMF? Well, he just doesn’t agree.

“No, I wouldn’t use the term ‘pressure,’ but…in the context of a firming global economy, especially in the U.S. we would expect to see some upward pressure in market interest rates, long-term rates in particular which, of course, are where the quantitative easing has a primary effect,” Poloz counters. “So as the tapering occurs we might expect to see as we saw in the summer some increases in long-term rates.”

And while he does agree with the Finance Minister that we’re seeing a soft landing in the housing market, he also believes that it’s still too fragile and that a major incident could still occur that could have that landing come crashing down.

“We believe that the consumer is going to be fine and we’ll have a soft landing but, of course, that assumes there are no major shocks,” Poloz continued. “So you always wonder if the next shock will be the thing that causes unemployment to rise like we saw five years ago and that setting it would be quite difficult to navigate with this level of indebtedness.

“That tells us that we should be holding rates where they are until the data flow changes our mind.”

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