By Greg Locke
ST. JOHN'S, Newfoundland (Reuters) - There is no predetermined path for interest rates from here and future moves from the Bank of Canada will be particularly data-dependent, Governor Stephen Poloz said on Wednesday.
Striking a cautious note and listing uncertainties facing Canada's economy, Poloz said the central bank will closely watch movements in longer-term interest rates and the exchange rate as it considers how to follow its two recent rate hikes.
"Monetary policy will be particularly data-dependent in these circumstances and, as always, we could still be surprised in either direction," Poloz said in prepared notes for a speech to the St. John's Board of Trade.
"We will continue to feel our way cautiously as we get closer to home, fostering economic growth and keeping our inflation target front and center," Poloz added.
He said several unknowns prevent the bank from thinking mechanically about the outlook for interest rates, including the sensitivity of the economy to higher borrowing costs given elevated levels of household debt.
The governor said that while cutting rates in 2015 was the right thing to do to counter the oil price shock, "at a minimum, that additional stimulus is no longer needed" as Canada's economy approaches the intersection of full capacity and the bank's 2-percent inflation target.
The recent strength of the Canadian dollar, which gained against its U.S. counterpart after the bank's back-to-back rate hikes in July and September, could affect the rate at which factors holding down inflation dissipate, Poloz said.
"Changes in interest rates naturally lead to movements in the Canadian dollar. However, currencies can move for many other reasons, including external factors, and these movements can affect our inflation outlook, depending on their cause, size and persistence," Poloz said.
With a nod to Canada's record-level of household debt and roller-coaster housing market, Poloz said policymakers do not yet have a full picture of how the market has responded to tighter mortgage rules and housing measures.
"There is reason to think that interest rate increases may have more of an impact on the economy and inflation than they did in the past," he said.
Poloz said that while Canada's expansion has become more broadly based and self-sustaining, the bank expects economic growth to moderate in the second half of the year after second-quarter GDP far exceeded expectations.
He also noted the bank's measures of core inflation have edged higher, as expected, since its July projection.