Poloz May Stop Dovish Rate Signs as Canada Data Show Life

Surprising gains in output and inflation will probably keep Bank of Canada Governor Stephen Poloz from signaling looser monetary policy again after the central bank sent dovish messages on its last three announcement dates.

Poloz will keep the overnight rate on loans between commercial banks at 1 percent in an announcement at 10 a.m. in Ottawa, according to all 20 economists surveyed by Bloomberg News. Policy makers will reiterate their next policy move could be in either direction, economists said.

“It’s going to take a lot to shake the bank out of its neutral stance at this point,” said Doug Porter, chief economist at BMO Capital Markets in Toronto, by phone.

The Canadian dollar weakened to four-year lows after the bank said Jan. 22 that the level of the currency is still hurting exporters. That followed a statement in December that warned inflation could stay below the bank’s 2 percent target longer than forecast, and an October announcement that dropped language about the future need for tighter policy.

Inflation concerns eased last month as Statistics Canada said the consumer price index accelerated more than forecast to 1.5 percent in January. The last report on economic growth, issued last week, showed expansion at a 2.9 percent annual pace at the end of last year, suggesting the world’s 11th largest economy has less spare capacity than the bank projected.

Trading in overnight index swaps indicates investors assign a 3 percent probability to an interest-rate reduction today.

‘Firmly Neutral’

“Whoever is predicting rate cuts, I think they have to redo their calculations,” said Krishen Rangasamy, senior economist at National Bank Financial in Montreal, in a telephone interview. The central bank will remain “firmly neutral” today, he said.

“We aren’t in the rate-cutting camp,” Pacific Investment Management Co.’s Canadian portfolio manager Ed Devlin said by telephone from London. While Devlin said he expects the next move will be to tighten policy, “we don’t think it will be this year, given our somewhat sub-consensus growth forecast, but we could see it next year.”

The Canadian dollar weakened as far as a four-year low of C$1.1224 per U.S. dollar in the days after the Jan. 22 monetary policy report, which said that the currency “remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports.” It traded at C$1.1092 per U.S. dollar at 5 p.m. yesterday in Toronto.

Dollar Weakness

The weakness isn’t translating into large or rapid gains for manufacturing, according to Alain Bedard, Chief Executive Officer of Montreal-based trucker TransForce Inc. “The depreciation of the Canadian dollar could have some effect in the manufacturing sector of Canada,” he said on a Feb. 27 earnings call. “We are starting to see a little bit more activity in our truckload sector right now.”

Poloz has said he’s counting on business investment and exports to lead a rotation of growth away from indebted consumers and governments. Consumers have piled up a debt burden that rose to a record 163.7 percent of disposable income in the third quarter, the latest figures available.

Consumers again led growth in the fourth quarter while business investment declined, Statistics Canada said last week. A separate report showed companies this year have the weakest investment intentions since the last recession in 2009.

While January’s inflation rate of 1.5 percent exceeded forecasts, that only provides “a bit of a cushion” for the central bank, so “I doubt we will see much change in the Bank of Canada’s message,” said Avery Shenfeld, chief economist at CIBC World Markets in Toronto.

Poloz has said that the signs of strength aren’t enough to justify a shift in monetary policy. “Our models tell us we’re on our way, and that’s good,” Poloz said in a Feb. 22 interview at a Group of 20 meeting in Australia. “It’s better than the opposite.”

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