Canadian Rebound May Mean No Repeat of Poloz’s Surprise Cut

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The Bank of Canada may signal today whether its January surprise rate cut was a rare one-and-done move, or more stimulus is needed, amid signs the damage from a plunge in oil prices isn’t as bad as feared.

Governor Stephen Poloz will keep borrowing costs unchanged for the second straight meeting at a 10 a.m. rate decision in Ottawa, according to all 17 economists surveyed by Bloomberg News. Poloz will also release a revised economic outlook, and hold a press conference.

Investors have pared bets of a second cut this year as Canada’s economy has fared better than economists expected in recent months. If Poloz chooses not to cut interest rates again, it would mark the first time in at least 20 years a policy change was confined to one move.

“It’s still more likely that Bank of Canada remains on hold” today, said Eric Lascelles, chief economist at Royal Bank of Canada Global Asset Management in Toronto. “There isn’t quite enough evidence for that further cut.”

The Canadian dollar, which has fallen 10.2 percent over the past six months, was down 0.4 percent at 7:14 a.m. to C$1.253 per U.S. dollar.

Poloz lowered rates to 0.75 percent to provide what he said was “insurance” against plummeting crude prices that are driving down incomes. Canada’s reliance on crude oil to drive the economy has turned from a blessing to a curse, as prices below $50 a barrel lead companies to cancel investment and cut jobs.

At the same time, the nation’s manufacturing industry, hobbled by years of stronger exchange rates, is struggling to lead the world’s 11th-largest economy. Last month, Poloz told the Financial Times the first quarter for Canada’s economy would be “atrocious,” providing fodder to opposition lawmakers to criticize Prime Minister Stephen Harper over his handling of the economy ahead of elections in October.

Less Dire

The economic data has proven to be less dire.

Statistics Canada April 10 reported an unexpected gain in jobs last month, in part because of hiring in the natural resource industry. Recent economic reports on output, construction starts and trade have also been better than expected, while Brent crude oil prices that plunged from $108 a barrel last year have moved closer to Poloz’s January assumption of $60. Policymakers are acknowledging the rate cut is working.

The surprise January cut “bought us some time to monitor” the impact of lower oil, Poloz said at a March 26 speech in London. The Bank of Canada is “increasingly comfortable with the amount of insurance we had already taken out.”

Canada’s economy isn’t out of danger yet. Crude oil is Canada’s top export and the price drop has triggered layoffs and canceled investments from companies such as Talisman Energy Inc. and Cnooc Ltd.’s Nexen Energy.

First Quarter

Poloz has said the central bank will need to cut its 1.5 percent estimate for first-quarter growth. Economists surveyed by Bloomberg forecast a 1.1 percent annualized pace.

Poloz has also warned the benefits that come from falling oil prices -- such as a weaker dollar -- take longer to materialize and are uncertain. Nor can central bank policymakers count on additional fiscal stimulus, which Harper has ruled out for a fiscal plan scheduled for April 21 in order to balance his budget.

The Canadian central banker has shown a willingness to surprise markets if needed, said Benjamin Reitzes, a senior economist at BMO Capital Markets in Toronto.

“The Bank believes the January cut bought them time to wait and see,” Reitzes said. “January’s shock cut shows he’s not afraid to surprise the market, so you can’t rule out a move.”

Investors aren’t ruling anything out. Swaps trading suggests a 46 percent chance of a reduction by July, though that’s down from almost 90 percent in mid February.

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