There are three main financial issues that worry the head of the Bank of Canada enough to keep him up at night.
In a speech Thursday on the state of the Canadian economy Stephen Poloz noted that while the country’s is the fastest-growing among the Group of Seven economies, there were still three “slower-moving, nagging issues” that he worries about: high house prices and household debt, cyber threats and the difficult job market for young people.
He described them as concerns that are a little different than the more-pressing, immediate issues.
“I hope I have not spoiled your festive, pre-holiday mood by talking about my pre-occupations,” he said.
“In case I have, let me repeat that the economy has made tremendous progress over the past year, and it is close to reaching its full potential. We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time.”
But still, he offered a hopeful look at situation.
On high home prices and household debt: he said while it still remains a vulnerability (the amount we owe relative to our income hit a new high today), he said the new mortgage guidelines — along with the mortgage interest rate stress test — are positive developments.
On cyber attacks: he said that all major participants in Canada’s highly-connected financial institutions are taking the threat seriously and the Bank of Canada is working on a plan to recover, if an attack should happen.
On employment for young people: he said it was important to reversing the long decline in their labour force participation, saying he wanted to “concentrate on young people, for whom a long period of unemployment can leave a scar that could last a lifetime.”
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Those are the long-term concerns, in more immediate news, he said that with the economy running at close to full tilt, a mechanical approach to setting interest rates would suggest higher borrowing rates should already be in place.
But Poloz said the central bank has been focused on scrutinizing some “unusual factors” at play, including encouraging signs companies are starting to expand their capacity by investing in equipment and by hiring more people.
In prepared remarks of his address released in Ottawa, he said wages have been growing and the workforce has seen a sudden jump in participation by young people.
“Given the unusual factors at play, the bank is monitoring these risks in real time – the term we use for this is data dependent – rather than taking a mechanical approach to policy setting,” Poloz said in a speech to Canadian Club Toronto.
Poloz said the bank’s governing council believes there’s still more room, albeit diminishing, for the labour market to grow before it starts pushing inflation higher. That factor could be providing an offset to the upward pressure from an economy operating close to its capacity and growth forecasts above potential.
He did acknowledge, however, that the current policy setting “clearly remains quite stimulative.”
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“With the economy operating near potential, a mechanical approach to policy would suggest that monetary policy should already be less stimulative,” Poloz said.
The central bank introduced two rate hikes this year due to the strong economy – once in July and again in September.
But since then, Poloz has kept the rate on hold, including at last week’s announcement. He pointed to uncertainty over trade and a greater-than-expected weakness in exports as reasons to stand firm.
Still, he continued to warn that higher interest rates will likely be required over time, even though the bank will proceed with caution by carefully assessing the incoming data.
*With files from Global’s Rebecca Joseph