Poloz Keeping Canada Rates Steady as Inflation Quickens

Bank of Canada Governor Stephen Poloz will reiterate his view today that unused capacity in the world’s 11th-largest economy will keep a lid on inflation, allowing policy makers to stay neutral on borrowing costs.

Analysts from Canada’s largest banks say Poloz will stick to the message about the risks of slow inflation he delivered last month, even as the latest data show consumer-price gains above the bank’s 2 percent target. All 21 economists in a Bloomberg News survey predict the central bank will leave its overnight lending rate at 1 percent for a 31st consecutive meeting in a decision due from Ottawa at 10 a.m.

Consumer prices rose an annual 2.3 percent in May after gaining 2 percent in April, the fastest pace of increases since early 2012. Speculation that accelerating inflation will provoke Poloz into raising borrowing costs earlier has propelled Canada’s currency to a 2.3 percent gain against the U.S. dollar over the past three months, the most in the Group of 10. The dollar may reverse some of those increases if Poloz focuses on spare economic capacity.

Poloz will be “neutral,” Benjamin Reitzes, a senior economist at BMO Capital Markets, said by phone from Toronto. “He wants to make sure he stays as dovish as possible to keep the Canadian dollar on the defensive.”

Several indicators support Poloz’s view of a tepid economy. Gross domestic product expanded 0.1 percent in April, suggesting second-quarter growth will be modest, after a harsh winter held output in the previous three months to a 1.2 percent annualized pace of expansion.

Data released last week showed a surprise job loss in June as the unemployment rate rose for a second month. Sixty-seven percent of executives in a Bank of Canada survey said inflation will remain below target over the next two years.

Bond Yields

Bond investors concur with the governor’s outlook. Canada’s benchmark 10-year government bonds yielded 2.22 percent at the end of last week, the lowest since Poloz took over the Bank of Canada last June.

“I expect Governor Poloz to emphasize the soft spots in the economy,” Ken Wills, currency strategist with CanadianForex, said by e-mail. This would have “the purpose of offsetting the inflation readings as noise, placing downward pressure on the loonie.”

Canada’s dollar, nicknamed the loonie, rose to a six-month high of C$1.0621 against the U.S. dollar on July 3. The stronger currency hampers economic growth by making exports less competitive. Poloz is relying on an increase in shipments abroad to lead a recovery has been driven mostly by consumer spending since the 2008-2009 recession.

Velan Inc. (VLN), a Montreal-based maker of industrial valves, said July 10 that net income in the three months ending May 31 fell to 18 Canadian cents a share from 26 cents a year earlier, in part because of a decline in “large export project” orders.

‘Persistent Slack’

Poloz’s statement will be “neutral with a cautious stance,” said Mark Chandler, head of fixed-income strategy at Royal Bank of Canada’s RBC Capital Markets unit in Toronto. “You have that persistent slack. He’s going to have his emphasis more on current slack in both the Canadian economy and the global economy.”

The central bank will still probably lift the inflation projections in its quarterly forecast, which will be published today along with the rate decision. The previous forecast called for second-quarter consumer price gains to average 1.6 percent.

Last month, Poloz pointed to temporary energy-price increases and a weaker currency to explain why inflation was higher than forecast. Economists say he’ll have a tougher time explaining why core inflation, which excludes volatile items such as gasoline, fuel oil and natural gas, has also quickened to 1.7 percent in May from a year earlier.

“Saying it’s all temporary seems unlikely at this point,” said Reitzes. Policy makers “will shift their focus a little more towards growth rather than inflation and emphasize that the medium-term risk on inflation is still on the downside.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: Paul Badertscher at pbadertscher@bloomberg.net Chris Fournier

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