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CNBC Transcript: Stephen Poloz, Bank of Canada Governor

Following is the transcript of a CNBC interview with Stephen Poloz, Bank of Canada Governor. The interview was broadcast on CNBC on 28 June 2017.

All references must be sourced to a "CNBC Interview".

Interviewed by Annette Weisbach, Reporter, CNBC.

Annette Weisbach (AW): So let us talk about the strong GDP growth we're seeing in the Canadian economy, at least in the first quarter. So where does it put you in terms of monetary policy?

Stephen Poloz: Well it's been encouraging. We really have had now over six months of pretty steady... And in fact in the first quarter really strong growth surprisingly so... But the fact, that ultimately right on our forecasts because we could see it coming for a few months. We do think it's going to moderate from there not to slow down dramatically but to be more normal pace but still above potential. So that's the important thing. That means that we're absorbing excess capacity that was build up you know in the wake of the crisis and then build up again in the wake of the oil shock two years ago.

AW: So given that strong growth or you're saying it's also higher than potential, there was no room for rate hikes to come?

Stephen Poloz: Well rates are of course extraordinarily low and we cut them by 50 basis points in 2015 to counteract the effects of the oil price shock speed up the adjustment. It does look as though those cuts have done their job. But we're just approaching a new interest rate decision so I don't want to prejudge. But certainly we need to be at least considering that whole situation now that the capacity excess capacity is being used up steadily.

AW: But looking at the oil price it's still, it's a very volatile factor. Also for your economy now being down again so it looks like very hot models. So how do you treat that?

Stephen Poloz: Well we don't really model what we do; of course model in the sense of understanding the risks and the upside of the downside. What we're forecasting we assume it'll stay constant at its latest average level. And so for the last couple of years actually it's been assumed to be 40 to 50 dollars somewhere in there. So still is 40 to 50 dollars for a member of the oil shock. We're talking about it fell by over 50 dollars that took 60 billion dollars per year of income out of Canada and that's the adjustment we've been talking about which is largely complete now that it's been in that zone I think that companies are managing with that volatility. But of course it remains an important variable for every forecast.

AW: So being here in Europe, being here in Sydney. So what's your main take away from that fence, is that the Europeans, that they're sort of behind where are you now. What is that?

Stephen Poloz: Well cyclically I'm encouraged that virtually every major area of the world now is gathering momentum. I don't think that's been true for a very long time. And so that synchronized growth phase is very positive. But we are all in different phases of the business cycle in terms of wobbles. The U.S. obviously way out in front. Canada some distance perhaps as much as two years behind given the oil shock. And then a little bit behind of course Europe. So but we are all there for grappling with the same issues in sequence. Well you know that's good for collaboration.

AW: Let us talk about the Fed and the hiking cycle. How are you dealing with it? What are you expecting for the remainder of the year?

Stephen Poloz: Well fundamentally it's good news because it means that the Fed has confidence that the economy is strengthening further. We can all see that. So that's good news for Canada with whatever combination that comes in, in terms of the policy setting of course strike an independent course have done in particular the last two years the oil price shock is bad for Canada and good for the U.S. economy. And so it meant that we had to actually cut rates while the Fed was contemplating raising rates. And I think markets understood that we didn't have any unusual exchange rate volatility and I'm not expecting any going forward. The economies are increasingly in sync which is a positive thing our growth is broadening just as the U.S. did over the last couple of years. We're just a little behind them.


Stephen Poloz: Well we've given up modelling specific initiatives because it's taking some time to come into focus and we think whenever something concrete is tabled we'll have then time to do the modelling and understand it. I think at the company level people have just been weighing this extra layer of uncertainty about the future. If you're in a business that relies on NAFTA every day of course it's concerning to know that it may change a little bit or significantly. It doesn't seem like the right time to make a major investment. And so we know that those uncertainties are holding back investment decisions even though investment is picking up. It's picking up less than it would without that uncertainty. So it's a bit of a headwind. But I'm sure the situation will clarify itself in due course.

AW: On to my next question, what are you expecting in terms of time horizon and when do we think we can get some more clarity on the policy mattress? I mean NAFTA's so important.

Stephen Poloz: Well NAFTA is the one that's mentioned most often. You could talk about fiscal shocks in the U.S. all day and it could be big could be small and we just don't know. NAFTA is a critical tool in Canada. And so by my understanding the actual negotiations will start later this summer and that they're all hoping for it to be relatively speedy. It suggests that they've got a tight agenda. And so let's keep our fingers crossed on that, that it's not a long drawn out process because of this that it is a headwind.

AW: Given the importance of NAFTA as you were explaining would that also hold you off on any policy action for the time being?

Stephen Poloz: When you, when there could be a negative shock that's one thing. But it being impossible to quantify. We'll have to deal with the data as they present themselves so as you can see us in the first quarter that uncertainty was there and that was holding people back. Nevertheless we had a 3.8 percent quarter. So we can't deny the data and just weigh it against something completely unknown thing. So we have to deal with what we have.