Bank of Canada governor Stephen Poloz says he expects long-term interest rates to rise this summer as the U.S. Federal Reserve continues tapering, but he believes that would be a positive development.
Poloz, who was named Canada’s top central banker in May, said he believes that the U.S. Fed will continue to taper its bond-buying program throughout the year and that will create market pressure on bond yields.
“In the context of a firming global economy, especially the U.S., we'd expect to see some upward pressure in market interest rates, long-term rates in particular, where the quantitative easing has its primary effect,” Poloz said in an interview with Amanda Lang on CBC’s The Lang & O’Leary Exchange.
“So as a tapering occurs we might expect to see as we saw in the summer some increases in long-term rates, most of it seems to be priced in,” Poloz added.
The Fed reduced its buying of U.S. bonds to $75 billion this month, after a decision announced at its December meeting to reduce the stimulus program meant to keep interest rates low and grow the American economy.
The market handled the tapering announcement well, though it put pressure on bond yields, including Canadian bond yields, Poloz said. That would lead to an increase in long-term fixed mortgage rates, though the Bank of Canada would not increase its benchmark rate.
“Those kinds of pressures are the positive ones – if the U.S. economy strengthens as we believe, those are very welcome market pressures,” Poloz said.
Poloz said he believes a long-term rate rise wouldn’t greatly hurt the Canadian economy as the housing market appears to be heading for a soft landing and consumer spending, which has kept the economy strong these last few years, must come down to bring down household debt levels.
The Bank of Canada kept its benchmark interest rate at one per cent in December, but there was an uptick in mortgage rates last summer after bond yields rose.
Poloz said he’s not worried about international calls for Canadian rates to rise, as Canada's Finance Minister Jim Flaherty suggested on Sunday. Flaherty warned in an interview that Canada will face global pressure to raise rates in 2014 as the Fed pulls back on its stimulus efforts.
Canada has to make its interest rate calls based on Canadian economic factors, including the unemployment rate, consumer spending and the low inflation rate, Poloz said.
Canada’s inflation rate – about 0.9 per cent annually in November – remains one of Poloz’s chief concerns. He said his target rate of closer to two per cent makes it easier for businesses to make investment decisions and wages to rise.
“I would say I'm most worried about inflation and how it's underperforming. It's a difficult one to explain right now; that always makes you worry,” he said.
Poloz said the signs for the U.S. and Canadian economy in 2014 seem positive, but there are still many "question marks" in his outlook, including why exports are not rebounding as quickly as expected.
"The export side does seem to be at least firming and the U.S. economy’s looking a little better around the edges so with that we expect to see that kind of positive cycle begin," he said.