Bank of Canada sees encouraging economic scene despite gloomy forecasts

Bank of Canada Governor Stephen Poloz described the gloomy forecast by the International Monetary Fund as "maybe an overstatement", in remarks made on Saturday, Oct 10, 2015. PHOTO: AFP

LIMA (Reuters) - Bank of Canada Governor Stephen Poloz painted a reasonably cheery picture on Saturday of the Canadian and global economic outlook despite some downgraded forecasts and concerns about China.

He said it was "maybe an overstatement" to characterize as gloomy the forecasts by the International Monetary Fund (IMF) and the talk about them at the annual meetings in Peru of the IMF and the World Bank.

And in Canada, he described confidence needed for business investment as building.

"As we said in July, certain elements of that appear to be coming together in the Canadian economy," he told three Canadian reporters attending the IMF meetings.

He made his remarks shortly before the start of the central bank's self-imposed blackout period for communications ahead of the Oct 21 release of its interest rate decision and quarterly Monetary Policy Report.

Poloz did not update the central bank's forecasts on Saturday but appeared sanguine about prospects both in his country and around the world. "There are enough things that are on track that it still remains an encouraging global picture," he said.

Poloz's outlook about the global economy, and especially the United States, is critical because of his view that Canada needs to transition its economic drivers from consumption and government spending to exports and business investment.

He placed heavy emphasis on demand from US business investment, which he said got going a year ago and faltered over the winter but seemed to have gotten back on track in the spring.

Delegates to the IMF meetings have spoken a lot about slowing Chinese demand and problems in emerging markets like Brazil, but Poloz played down the troubles.

"China's going through, in historical terms, a fairly typical moderation in headline growth which reflects a maturation of its growth story," he said.

And for all the talk about potential trouble in emerging-market nations, he said a wide array of them were in a much stronger position than a decade ago, with accumulated reserves, more flexibility of exchange rate regimes, and reforms introduced.

"All of that suggests that there ought to be in some measure more resilience out there," he said, adding that enhanced global financial regulations would lessen the ramifications of a possible shock.

Poloz acknowledged a key Canadian vulnerability was the increasing level of high household debt, associated with a hot housing market.

But he said that Canadian authorities had made "very timely" macroprudential regulatory changes, such as reducing the amortization period on insured mortgages, that had reduced risks in the most vulnerable pockets of the housing markets.

Asked if the Canadian regulatory structure was appropriate, he said: "It has been in the past quite responsive to the situation. So I think the evidence in front of us is that it works."

In a separate speech in Lima, he reiterated the bank's position that monetary policy should be the last line of defense against possible assets bubbles such as in the housing market. "Even in extreme conditions, when financial stability risks constrain monetary policy from achieving the inflation target over a reasonable time frame, a central bank would want to ensure that all macroprudential options were exhausted before trying to address those risks with monetary policy," he said.

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