BoC governor Poloz shows off unconventional policy tools, but they are staying on the shelf for now

Bank of Canada governor Stephen Poloz spoke in Toronto today. His speech covered the tools at the Bank of Canada's disposal for providing unconventional monetary policy, as well as the outlook for the Canadian economy in the coming years. Alongside the governor's remarks, the Bank of Canada also published an updated framework for unconventional measures. The measures were largely unchanged from the past, with one notable exception: the Bank now views the effective lower bound for interest rates as -0.50%, rather than 0.25% as communicated in the past.

The governor also reiterated his outlook for growth. Recent economic developments are seen as largely in line with the Bank of Canada's view that steady growth in 2016 and 2017 will lead to a closing of the output gap by mid-2017. Governor Poloz had a fine line to walk in his speech given the simultaneous release of the updated unconventional policy toolkit, and weaker economic momentum heading into the fourth quarter. The key takeaway from the speech is that for the time being at least, it is "business as usual" for the Bank of Canada.

As was widely expected, the Governor acknowledged that the Bank of Canada may take its policy rate "below zero" if warranted, but clearly noted that they do not see an immediate need for such action. Indeed, the Governor made it very clear that although the Bank of Canada has many tools at its disposal, it has no immediate plans to use them, reiterating the risks and weaknesses associated with unconventional policy such as the exacerbation of financial imbalances. As if to underscore the point, the Governor re-affirmed the Bank of Canada's latest growth forecast, which sees steady growth at or above 2.0% over 2016 and 2017, obviating the need for further monetary easing. 

"We are less optimistic about the outlook for growth, but nevertheless expect the Bank of Canada to remain on hold as economic slack is slowly taken in", says TD Economics.

The outlook has deteriorated, and further or more prolonged weakness in commodity prices or foreign demand may blow growth off course and necessitate further easing. Today's speech confirmed that should these risks materialize, the Bank of Canada has many tools remaining to help restore growth.