The Canadian dollar trimmed back its losses on Tuesday after Bank of Canada governor Stephen Poloz said the economy is operating at near full capacity and that higher interest rates will be required over time.

The currency, which had been down as much as 0.6 per cent ahead of Mr Poloz’s speech, rallied to trade up as much as 0.2 per cent to C$1.2821 before slipping again to C$1.2855, or 0.1 per cent lower for the day.

In a speech to the Yellowknife Chamber of Commerce, Mr Poloz said high household debt levels are likely to persist in Canada for years, which means the central bank will need to be careful on how higher borrowing costs would affect these households.

Still, the general tone of the speech was interpreted by the markets as more hawkish than dovish, with Mr Poloz appearing confident that more interest rates rises would be needed, even after the bank had hiked rates three times since last summer.

“The economic progress we have seen makes us more confident that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed,” Mr Poloz said. “We will continue to watch how households and the entire economy are reacting to higher interest rates. And we will be cautious in making future adjustments to monetary policy, guided by incoming data.”

Household debt “poses risks to the economy and financial stability, and its sheer size means that its risks will be with us for some time. But there is good reason to think that we can continue to manage these risks successfully,” he added.

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