Tuesday September 20, 2016
By Leah Schnurr
QUEBEC CITY, Quebec, Sept 20 (Reuters) – – Interest rates will stay lower for longer, and businesses need to adjust expectations for return on investment or Canada’s economy risks not seeing the improvement in productivity needed for growth, Bank of Canada Governor Stephen Poloz said on Tuesday.
In a speech outlining what low rates mean for businesses and governments, Poloz said it is obvious the Canadian economy is still facing strong headwinds and needs stimulative monetary policy to counteract them and move the country closer to full capacity.
“We also need to watch the full effects of the government’s fiscal stimulus unfold,” he said in a speech to economists in Quebec City that once again put the onus on government to stimulate the economy, given the already low level of official interest rates.
Poloz urged corporations to adjust the hurdle for new investment, saying it has been weaker than expected because some firms aren’t taking the low rate environment into account when deciding if an investment is worthwhile.
The governor said that while companies were uncertain about future demand prospects, they should not expect the kind of returns they could get before the financial crisis.
“My response has been to say that in the current and prospective environment, 4 percent will probably turn out to be a pretty good return,” Poloz said.
“Businesses need to make sure their expectations about investment returns reflect the current and likely future reality and reconfigure their investment plans accordingly.”
The Canadian dollar slightly pared earlier losses against its U.S. counterpart after Poloz’s remarks.
Poloz also said the aging of the population has driven a steady decline in the economy’s potential growth rate, but that companies and governments alike need to make adjustments because accommodative monetary policy is not as stimulative as it would have been before the crisis.
“Put simply, we’re dealing with lower for longer, not lower forever … we cannot just sit back and wait for these slow-moving forces to reverse,” he said.
Poloz said tax and immigration policy and business financing conditions should be aimed at nurturing firms, and argued that lowering trade barriers would help boost growth.
(Additional reporting by Andrea Hopkins and David Ljunggren in Ottawa; Editing by Paul Simao)