VANCOUVER, Sept 18 (Reuters) - Bank of Canada Governor Stephen Poloz took a notably upbeat tone on Wednesday, predicting the Canadian economy would start to strengthen and its potential for growth increase as the U.S. recovery takes hold.
'Evidence suggests we are now close to the tipping point from improving confidence into expanding capacity,' he said in the prepared text of a speech to the Vancouver Board of Trade.
In his second speech since becoming governor on June 3, Poloz said he anticipated the Canadian economy would 'normalize and growth will become natural' rather than relying on low interest rates.
The Bank of Canada has held its key rate at 1 percent since September 2010, and has suggested its next move will be a rate increase rather than a cut.
In a new hint of his outlook on monetary policy, Poloz said the potential for growth in Canada - the speed at which the economy can grow without fueling inflation - would increase as businesses invest more and expand capacity.
That means the closing of the so-called output gap, a key factor in determining how soon the bank will tighten rates, could take longer than it would if that investment did not occur.
'The message here is that the economy should be able to support stronger activity without stoking inflation as investment ticks upward,' he said.
Poloz did not give any guidance on when the central bank might next change rates, but said 'policy rates in Canada will be higher than they are today,' and said short-term interest rates would be above inflation.
Poloz spoke just hours before a highly anticipated announcement from the U.S. Federal Reserve. The Fed is expected to make a modest reduction in its stimulative $85 billion per month bond-buying program, in a nod to the strengthening of the U.S. economy over the past year.
Poloz said Fed tapering would be 'another welcome sign that things are getting back to natural growth' and would show the underlying momentum of the U.S. economy was expected to hold.
Since taking the helm at the central bank in June, Poloz has repeatedly laid out the sequence of events he believes needs to occur before the Canadian economy can fully bounce back from the 2008-09 recession. It starts with an increase in foreign demand for Canadian products, followed by strengthened exports and improved confidence, and ultimately an increase in business investment and the creation of new companies.
Already there has been a strengthening of foreign demand, Poloz said, predicting solid growth in exports. The lag between improved exports and a pickup in investments is usually about six months, he added.
(Reporting by Louise Egan and David Ljunggren; Editing by Peter Galloway) Keywords: CANADA ECONOMY/POLOZ
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