Poloz Says Economy Needs Heat to Test Potential, Draw Workers

(Bloomberg) -- Canada's economy needs to run a little hot to test out its full potential, the head of the country's central bank said.

Companies are in an expansion phase and policy makers don't want higher borrowing costs to crimp business expansion or hiring plans, Governor Stephen Poloz said Wednesday in an interview with BNN, Bloomberg's Canadian television partner.

“This phase of that capacity build-out actually requires a little bit of heat in the economy,” Poloz said, after he raised the central bank's key lending rate to 1.25 percent. “It needs the stronger wage increases to draw those people in, to get people to shuffle jobs to find the best match for their skills and what they can contribute so productivity goes up.”

“All those things, they really don't happen if the economy is still operating almost at potential,” Poloz said. “So a little bit of heat therefore if you like, some upside risk on inflation, is part of that deal.”

Investors predict Poloz may raise borrowing costs twice more this year, which would bring the benchmark rate to 1.75 percent, still below what the bank considers the neutral level. The risks of faster inflation should be weighed against what could be a permanent boost to output, Poloz said.

Very Careful

“If you're worried about inflation risk and so on first of all,” Poloz said, “you have a tendency to nip that process in the bud. And we are being very careful not to do that.”

Asked about whether the central bank should raise rates to give itself more room when the next downturn comes, Poloz said policy makers have learned negative interest rates can work in the real world, not just in theory, and that has changed the bank's notion of what room they have to maneuver.

“I take comfort from the knowledge that virtually every cycle in history hasn't died of old age, it's gone into recession because of policy changes somewhere, or some crisis somewhere,” he said. “So if we are all doing our thing with financial stability risks and keeping things under control, I see this expansion going on for quite some time.”

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, Chris Fournier

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