Bank of Canada Governor Stephen Poloz said there’s no need for another interest-rate cut amid evidence the economy is recovering from the oil shock.
A global spate of monetary easing and rebounding oil prices are giving momentum to Canada’s recovery, Poloz said, adding his comments last month about the country’s first-quarter growth being “atrocious” were designed to discourage investors from betting on another rate cut.
Policy makers shocked markets on Jan. 21 by delivering a 25 basis point reduction to the benchmark rate, a move Poloz called “insurance” against the impact of falling oil prices. Those prices are recovering and the positive effects of the oil shock should begin to show up later this year, he said.
“The insurance amount was about right,” Poloz, 59, said Tuesday in comments to the House of Commons finance committee in Ottawa. “Therefore, there is no need for us to take further action to offset the shock that has occurred.”
Canada’s dollar appreciated to the strongest since the Jan. 21 rate cut today, rising 0.6 percent to C$1.2031 per U.S. dollar at 12:47 p.m. in Toronto. Responding to a question about the dollar’s value, Poloz pointed to a chart he brought showing the exchange rate has been in line with swings in prices for crude oil, Canada’s top export.
The central bank cut rates in the middle of a slide in oil prices, just as policy makers were crafting their projections, and the move wasn’t aimed to “surprise or frighten” anyone, Poloz said. Output growth will quicken to a 1.8 percent annualized pace this quarter and to 2.8 percent in the third quarter, the bank says.
“If you are expecting stronger growth in the second quarter and in the second half, then it would appear you don’t need to cut rates again,” John Clinkard, chief economist at Deutsche Bank Canada, said by phone from Toronto.
Asked about his comments to the Financial Times last month that Canada’s first-quarter economic data would be “atrocious,” Poloz said his intention was to emphasize the bank had factored in the slowdown, and so “that markets would not be therefore doubling up on their bets that the Bank of Canada would need to do further actions.”
“At that time we were redoing our forecasts and we needed to do a full assessment to see if the amount of insurance was approximately right,” Poloz said. “In the end we believe it was.”
Since then, reports on retail sales, employment and gross domestic product have all beaten consensus Bloomberg economist forecasts. Canada’s core inflation rate, which excludes eight volatile items, has also exceeded the bank’s 2 percent target for overall consumer prices since August. The risks around the inflation outlook are balanced, Poloz said today.
The economy will return to full capacity around the end of next year, Poloz reiterated today. Non-energy companies have money to invest when it’s clear the global recovery is durable after years of disappointment, Poloz said.
“Outside of the energy sector, other areas of the economy appear to be doing well,” Poloz said. “The segments of non-energy exports that we expected to lead the recovery are doing so, and we expect this trend to be buttressed by stronger U.S. growth and the lower Canadian dollar.”
Poloz said Canada’s housing market doesn’t fit the definition of a “bubble” because there’s no evidence of runaway prices, and new construction is generally in line with the needs of the population.