Poloz to Keep Canada Growth Focus as Low-Inflation Risk

Canada’s central bank will probably signal today it’s staying focused on a weak economy that’s restraining price increases for most goods rather than surging energy costs that it regards as transitory.

Governor Stephen Poloz will keep the overnight lending rate at 1 percent, where it has been for 30 straight meetings since September 2010, in a decision due from Ottawa at 10 a.m., according to all 21 economists in a Bloomberg News survey. The bank is also likely to remain neutral about the direction of its next policy interest-rate move.

The world’s 11th largest economy grew at a 1.2 percent annualized pace during the first quarter, the slowest in more than a year and adding to spare capacity in the economy. This will probably lead Poloz to reiterate the risks of low inflation even after surging energy costs boosted price gains to the bank’s 2 percent target in April.

“They will repeat that downside risks to inflation remain important,” said Benjamin Reitzes, a senior economist at BMO Capital Markets in Toronto, by telephone. “Their goal at the end of the day is to be dovish enough that they don’t positively impact the Canadian dollar.”

Canada’s dollar has weakened by almost 6 percent against the U.S. dollar over the last year to C$1.0908 at 5 p.m. yesterday, the most among 10 major economies tracked by Bloomberg, something that aids exporters such as bus maker New Flyer Industries Inc. Poloz has said Canada needs to see business spending and exports take over from indebted consumers as drivers of growth if the country’s expansion is to last.

While some companies have benefited from the weaker dollar, it hasn’t been enough to boost growth figures yet, with a harsh winter in North America slowing housing construction, business spending and exports during the first quarter.

Long-Term Weakness

The currency needs to be weak over a long period for automakers to boost investments, Magna International Inc. Chief Executive Officer Don Walker said in a May 13 interview. “The real issue for the auto industry is where do the car companies think it’s going to be long term,” the head of North America’s largest auto parts maker by sales said at the Bloomberg Canada Economic Summit.

The central bank doesn’t have a target for the currency level and is mandated to keep inflation in the middle of a 1 percent to 3 percent band. The bank forecast in April that inflation, excluding eight volatile products, won’t reach 2 percent until the start of 2016 because spare economic capacity will restrain price gains.

While total inflation is forecast to hit the target in the first quarter of 2015, Poloz said at the last decision that he will ignore “transitory” price gains such as energy costs. The consumer price index rose 2 percent in April from a year ago on higher gasoline costs, and regulated increases in electricity and natural gas prices.

Export Pick-Up

“None of these factors are driven by stronger underlying domestic growth,” said Emanuella Enenajor, an economist at Bank of America Merrill Lynch in New York. “We still haven’t seen the sustained export pick-up the Bank of Canada is hoping will close the output gap and push underlying inflation higher.”

The central bank will also maintain its “firmly neutral” bias on interest rates, Charles St-Arnaud, senior economist with Nomura Securities in London, said in a note to clients. Reitzes at BMO Capital Markets also said policy makers aren’t close to either a rate increase or cut.

“They are happy to stay on the sidelines,” he said.

Today marks the first decision since Carolyn Wilkins replaced Tiff Macklem as Senior Deputy Governor and Lynn Patterson became a deputy following the retirement of John Murray. The new faces probably won’t lead to a shift in policy, Reitzes said.

“I would be surprised if they deviated all that much; it’s still the same governor,” he said.

Before it's here, it's on the Bloomberg Terminal.