A seven years bubble will leave a seven years crater once it bursts – according to Bank of Canada Governor Stephen Poloz. Although we have almost made it through the recession but few more miles still remain to be gained. Despite of him defining the most recent Canadian recession as a history, he still used cautious words– like – we are not yet back to normal.
His first concern appears to be low interest rate. Obviously everyone is worried about low rates but not much we can do about it. He mentioned that growth in new business area is very slow and existing businesses are nervous of taking new steps.
Poloz thinks that once inflation rate hits 2% for a reasonable duration – short term interest rates will eventually go up to envelop the rate of inflation. As far as the drooped yield curve goes – he predicts that it will eventually settle in its real place.
He did not give any timeline for that – as usual.
According to him – the long term rates are slowly going up. The upward movement of rates may very well be a trend that is here to stay – given the recent surge in fixed rate market.
Withdrawal of stimulus:
The favourite word of all the central bankers is – withdrawing the stimulus. Generally when the bank intervenes against rate hike in the short term inter-bank loans – it has to pour a lot of money to make it happen.
The only way to put more money in the financial market is to print it. Too much money in circulation has the potential to put pressure on currencies. To stay away from that risk – it is necessary for the bank to reduce its interventions.
Once GDP stabilizes at a non-inflationary level – the bank will act.
So far there is no timeline available for the rates to go up – it is already happening around us.