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Bank of Canada in uncharted territory, says new chief Poloz

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(Globalpost/GlobalPost)

By Euan Rocha and Peter Henderson

BURLINGTON, Ontario (Reuters) - The Bank of Canada cannot rely on its usual models to assess the economy because of unexpectedly high levels of uncertainty, with the biggest risks coming from abroad, the new central bank chief, Stephen Poloz, said on Wednesday.

Answering audience questions after his inaugural speech, Poloz said the central bank was in "uncharted territory" and called for direct feedback from those doing business on the ground in order to better understand what is happening.

"The models that we use are not really equipped to deal with the situation that we find ourselves in," he said.

"The biggest risk that we face today, I suppose, is still an external one, which is that the world may not recover with the same kind of vigor that, at the moment, we're hoping for and actually seeing signs of."

He said problems in Europe could take a long time to play out but he was upbeat about Japan's "monetary experiment" and about the U.S. recovery.

"So right now, we're thinking 'Yeah, the glass is half full and off we go.' But that doesn't mean we couldn't have a surprise, like we've had before."

Poloz, who took over as central bank governor on June 3, was careful not to reveal any particular bias on monetary policy, saying the bank only signals its intentions at pre-scheduled announcement dates. The next one is July 17.

"Our broad takeaway is that this speech further reinforces our prolonged (rate) pause forecast into 2015," said Scotiabank' economists Derek Holt and Dov Zigler. They said Poloz's remarks did not reinforce the bank's mild rate-tightening leanings, nor did it support the view that a rate cut is in the pipeline.

Poloz's speech and news conference were held slightly before the U.S. Federal Reserve's policy announcement and Fed Chairman Ben Bernanke's news conference.

The Bank of Canada is an outlier among the Group of Seven industrialized nations for being the first to hike rates, in mid-2010, after the global recession. It lifted its overnight target rate to 1 percent at that time.

Since April 2012 it has signaled that the next move in rates will again be up, not down, although it has made clear it is in no rush given the disappointing economic backdrop.

A Reuters poll on May 23 showed most economists don't expect the bank to raise rates until the fourth quarter of 2014.

FOCUS ON BUSINESS CONFIDENCE

In his speech, Poloz stressed the crucial role of business confidence in driving the economy's return to health.

There are signs that confidence is returning, he said, but he called for patience in waiting for events to unfold, starting with greater foreign demand and stronger exports.

"We need business confidence to continue to heal. This matters very much to the Bank of Canada. Our understanding of these issues will be part of the rigorous distillation of information that drives our policy decisions," he said.

Companies have healthy balance sheets and the capacity to invest, he said.

His predecessor, Mark Carney, got into hot water with business leaders for chiding them for sitting on what he called "dead money" instead of investing.

Business investment has been slower to rebound than after previous recessions and it slowed in the second half of 2012. In April, the central bank forecast a subdued pickup in business investment growth in 2013.

On the issue of soaring household debt, a top concern for Carney, Poloz said he was confident Canadians were heeding the bank's message that "interest rates will rise at some point" and would manage their debt accordingly.

He noted "a constructive evolution of activity" in housing while acknowledging choppy data recently, which some believe suggests renewed strength.

(Writing by Louise Egan and Randall Palmer; Additional reporting by Solarina Ho, Alastair Sharp, Andrea Hopkins, Cameron French and John Tilak; Editing by Peter Galloway, Janet Guttsman and Leslie Gevirtz)

http://www.globalpost.com/dispatch/news/thomson-reuters/130619/bank-canada-uncharted-territory-says-new-chief-poloz