Bank of Canada Governor Stephen Poloz said his January interest-rate cut seems sufficient to put the economy back on track amid rebounding oil prices, and signaled the biggest risk to his forecasts may be U.S. outperformance.
“The U.S. economy has great fundamentals,” Poloz said during a talk Monday at the Bloomberg Americas Monetary Summit in New York. “I think it’s going to pop and we’ll have performance there that is a lot stronger than everyone’s expecting.”
Poloz became the first Group of Seven central banker to ease monetary policy in response to the drop in oil prices, cutting the key rate in January to 0.75 percent. He called it “insurance” against the impact of the downturn. In a statement last week, Poloz suggested the worst of the oil shock may be over, and policy makers now consider the biggest risk to their outlook a U.S. economy that surpasses expectations.
“That’s another shock that would happen and you would reevaluate in the context of those oil prices whether you would need to adjust your policy path,” Poloz, 59, said during a panel discussion with Bloomberg’s Erik Schatzker.
The surprise Jan. 21 rate cut “seems to be about right to restore our track for the Canadian economy for the next year or so and get the output gap to close late in 2016,” Poloz said. “The amount of insurance was just about the right amount.”
The comments Monday are consistent with what is perceived by investors as a less dovish tone from the central bank in recent weeks. Yields on three-month bankers’ acceptances, a benchmark for short-term business loans, climbed to 1.01 percent after Poloz’s comments, the highest since he cut rates.
“Poloz sounds as if he’s done for now, although upcoming data will be key,” said Thomas Costerg, a New York-based economist at Standard Chartered Bank, who forecast easing at the start of the year. “Overall a rather bullish stance, particularly on U.S. growth -- and a significant belief that the rising U.S. tide will lift the Canadian boat.”
If Poloz gets through the oil decline with just one rate cut, it would be the first time in at least two decades the Bank of Canada has moved interest rates just once in response to an economic shock. The tension is between crude oil, which has become Canada’s top export, and a longstanding cycle of piggybacking on recoveries in the U.S., which buys 75 percent of Canada’s exports.
At the time of the rate cut, the data on which the central bank was making its decision was uncertain, Poloz said. Oil prices have since pared losses and combined with monetary easing globally that has helped lower long-term bond yields, Canada’s interest rates have become appropriate.
“We know a lot more today than we knew in January,” said Poloz, noting the central bank has stopped using the word “insurance” to describe its policy move. “Our biggest risk I think today is the U.S. economy will prove to be quite a bit stronger than most of us are assuming.”
Interest-rate increases by the U.S. Federal Reserve would also be “positive” because they would signal a stronger American economy, which would create a positive “spillover” for Canada, Poloz said.
The central bank said last week that along with risks from lower oil prices and stronger U.S. demand, the “imbalances” in household finances such as high debt loads could also take the economy off course.
Poloz, who started work in June 2013, reiterated Monday he prefers to avoid “forward guidance” unless policy interest rates are at about zero, saying markets should evaluate economic signals instead of relying on central bank comments.
Asked about his January rate move -- which no economist surveyed by Bloomberg predicted -- Poloz said, “I would prefer not to surprise the market,” adding he has no policy bias today.
The Bank of Canada has “opened the kimono” to become “totally transparent about our analysis” of the risks to the economy, he said.
In the central bank’s April 15 monetary policy report, Poloz signaled the worst of the oil-price shock to the economy may be over, with improvements ranging from early signs of labor-market strength to gains in the non-energy exporting sector. That helped push the Canadian dollar up 2.6 percent last week versus its U.S. counterpart, the biggest weekly increase since December 2011.
Even the oil industry provides some reason for optimism. Poloz said oil producers have become more nimble at adjusting costs in response to demand shocks in the global oil market.
“What we’ve got is a more elastic supply side in the commodity market,” Poloz said, and a “more competitive structure implies a much longer horizon over which a supplier can survive.”
The risks for oil prices are that they could head lower in the short term, while over a longer term there is a greater chance prices will be higher than assumed, Poloz said.