OTTAWA – The governor of the Bank of Canada says he didn’t mean to surprise markets in recent months with his stunning interest-rate cut, his startling real estate projection and the grim adjective he chose to describe the country’s economic performance.
During testimony Tuesday before a parliamentary committee, Stephen Poloz was asked about his eyebrow-raising use of “atrocious” to describe the oil slump’s effect on the economy over the first three months of 2015.
Poloz also fielded questions about the central bank’s recent assessment that Canada’s real estate prices could be overvalued by as much as 30 per cent, even though it has stressed the country is not facing a housing bubble.
James Rajotte, the chairman of the House of Commons finance committee, asked Poloz if he was trying to shock the markets on purpose, particularly since analysts dissect his every word. Rajotte even suggested Poloz’s style was less measured than his predecessor, Mark Carney.
“It’s certainly not our intent to surprise or to frighten people,” Poloz told parliamentarians.
The hearing Tuesday was the first chance for committee members to grill Poloz since his appearance in early November — right before already-tumbling oil prices rolled off the cliff.
Since then, the bank released an estimate in December that housing prices were overvalued between 10 and 30 per cent.
In January, the bank lowered its trend-setting interest rate to 0.75 per cent from one per cent — a cut that enticed consumers to pile on more debt, including mortgage debt.
On Tuesday, New Democrat MP Guy Caron noted to Poloz how foreign studies have suggested Canada is staring at a classic housing bubble.
The governor dismissed the suggestion, reiterating the bank’s position there’s little evidence of bubble symptoms.
For one, Poloz highlighted the lack of highly speculative behaviour, such as people buying multiple houses with the purpose of selling them later on for profit. He also argued that home construction has been very much in line with demographic demand.
“So, there’s no excess, if you like,” said Poloz, who added the country isn’t seeing “truly runaway pricing” either.
Poloz said today’s overvalued housing market is a necessary by-product of the effort needed to guide the economy through the Great Recession. In fact, he noted it would have been unusual for Canada to emerge from the crisis without inflated house prices, since the increased borrowing amid the lower interest rates helped prop up the economy.
Carolyn Wilkins, the Bank of Canada senior deputy governor who also appeared at Tuesday’s hearing, said the housing market is headed for a “soft landing” overall even with the decline of Alberta’s market, which was particularly sensitive to the collapse in crude prices.
Poloz has defended his decision to cut the overnight rate as insurance against the speed and magnitude of the oil-price slide, which he described Tuesday as an “extremely uncertain situation.”
The governor insisted the rate reduction has had a positive effect on the economy, though he acknowledged the evidence to back up that belief still remains “thin” at this point.
He did, however, offer some examples of the positive signs.
Poloz noted how Canadians with flexible mortgage rates, and those who have recently renewed, are already enjoying lower payments. And companies with existing export contracts are benefiting from “enormous” increases to their cash flows thanks to the weaker exchange rate.
The rate cut, he reiterated, was necessary to buffer the economy from the bite of the lower oil prices, which led him to tell an interviewer last month that economic data for the first quarter of 2015 would look “atrocious.”
The bank is projecting zero growth for the first few months of the year, but it predicts the economy will start accelerating as early as this spring with help from the strengthening U.S. economy.
Rajotte asked Poloz if he had regrets about using the word atrocious, a headline-grabbing remark that opposition parties have tried to use as a way to attack the economic credentials of the Conservative government.
“What I was trying to describe was over the course of these few months, the day-to-day data flow could look very negative,” Poloz said in a cautious response.
“Nobody knows what the first quarter looks like yet. Our forecast is that it’s zero and that seems to be reasonably in line with what others are saying.”