Poloz Backs Deficits as Canada May Also Need Lower Rates

(Bloomberg) -- Bank of Canada Governor Stephen Poloz said the government can afford large deficits to aid a weak economy, and signaled he may also need to lower interest rates again.

Canadian business spending is being pulled down by slower labor force growth as the country's population ages, Poloz told Global TV's Tom Clark in an interview aired Sunday from Ottawa. The U.K.'s decision to leave the European Union and the U.S. election are also creating uncertainty, Poloz said, so finding even small sources of enhanced growth is more important than worries about budget deficits.

“There is a balance somewhere, but I can tell you that I think we're pretty far away from that balance point,” Poloz said when asked about possible dangers of running large deficits. “Canada is in a very good fiscal situation, so we shouldn't be worrying about that at this time.”

The comments are some of the Governor's bluntest yet about the mix of policies needed to revive an economy still hurting from a crash in crude oil prices that brought Canada to the brink of a recession last year. Poloz on Oct. 19 said he considered cutting his 0.5 percent interest rate for a third time in response to the shock. Instead, he stood pat to monitor the jolt from the start of Prime Minister Justin Trudeau's deficit spending and see if business confidence would lift after the U.S. election, now less than three weeks away.

“Uncertainty is something you can't really go out and address,” Poloz said. “But you can do things which instill extra confidence,” he said. “One thing we can do is, yes, lower interest rates.”

More Potent

Poloz has said the boost from fresh fiscal stimulus would be more potent than another move down in already low interest rates. In the interview Sunday, he backed the recommendation from a blue-ribbon panel convened by Finance Minister Bill Morneau calling for the government to use its money to attract private investors to infrastructure projects. Poloz called that arrangement “a very good plan.”

Business leaders often complain to Poloz about poor infrastructure and Canada needs “every point” of additional growth it can find, he said. Government-funded projects that can lift growth are“very likely to pay off very well,” he said. Canada's potential growth rate is about 1.5 percent now, so lifting it to, say, 1.7 percent would be a much “bigger deal” than in past decades, Poloz said.

Much of the uncertainty has come from beyond Canada's borders, including Brexit and the American presidential election, Poloz said.

“The companies that I talk to have growth plans,” he said. “But when every day or every week something happens to make them question that plan,” then “they have a tendency to hold back.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net. To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Ros Krasny, Vince Golle