Poloz Rejects Idea Bank of Canada Is Talking Down Currency

Bank of Canada Governor Stephen Poloz rejected speculation he is trying to boost growth by weakening the Canadian dollar, saying the currency’s decline reflects a deterioration in the economy’s outlook.

“I honestly reject the notion that I’m talking down the dollar,” Poloz told reporters in Istanbul, where he’s attending a meeting of Group of 20 finance chiefs. “It’s not about what we did. It’s about how the economy has behaved.”

The Canadian dollar has lost 18 percent against the U.S. dollar since Poloz became governor in June 2013. It’s fallen 3.2 percent since he unexpectedly cut interest rates on Jan. 21 by a quarter percentage point.

Investors are seeking clues about the central bank’s next move, with derivatives trading indicating a better than 50-50 chance policy makers will cut the benchmark rate again, to 0.5 percent, at the March 4 meeting. Senior Deputy Carolyn Wilkins delivers remarks at 12:35 p.m. in Ottawa.

“Poloz’s tenure has followed a pattern of making moves that ultimately weaken the loonie,” Ken Wills, Toronto-based currency strategist at CanadianForex, said by e-mail, using the nickname for Canada’s one-dollar coin. Whether Poloz cuts again in March “will depend on where oil trades over the next month as I can’t see other fundamental data improving between now and then,” Wills said.

Oil Assumption

Crude oil is Canada’s biggest export and global prices have dropped to about $50 a barrel from more than $100 in June. The central bank’s January forecast was based on the assumption of oil at $60 a barrel, and at 9:02 a.m. on the New York Mercantile Exchange today West Texas Intermediate for March delivery was $52.38.

Poloz said since he was appointed, the economy has performed below policy makers’ expectations even before the decline in oil prices.

“It’s only by being open about that and people seeing it happening and, oil prices declining on top of that, that the dollar has moved,” Poloz said. “The oil-price move, my goodness, oil prices have got to be responsible for 99 percent of what we’ve seen.”

‘About Fundamentals’

Asked about market expectations for further rate cuts, Poloz said it will all depend on the economy’s fundamentals.

“Markets presumably look at the oil-price shock itself and would ask themselves how’s the economy performing?” he said. “If they figure that out, then they would know what we might have to do.”

“It’s not about what we’re doing with that, it’s about the fundamentals,” he said. “Income has been cut by about 3 percent, that’s more than a year’s worth of growth erased. It’s not just a theoretical disturbance, it’s the real deal.”

Poloz said it had taken analysts some time to understand fully the deep and immediate impact the oil price shock would have on the economy, while the benefits of falling energy costs would only filter through the economy with a lag.

“As the oil price shock unfolded, it was taking a while for people to get up to speed on what all these implications would be,” Poloz said. Falling income “happens right away.”

“So you cut investment, you cut employment, people who got the income directly spend less, all those things happen immediately,” he said.

Gradual, Uncertain

The benefits only happen later, if they happen at all, Poloz said, citing the possibility households will pay off debt rather than increase consumption.

There is no guarantee either that manufacturers, who haven’t behaved normally for years, will “suddenly” pick up spending.

“That’s what I mean by gradual and uncertain versus known and immediate,” Poloz said.

Poloz also dismissed suggestions he has been changing the focus of his monetary policy positions, from core inflation earlier in his tenure to weakness in the labor market and falling incomes today. The bank’s January forecast showed core inflation holding close to policy makers’ target of 2 percent for overall consumer prices through the next two years.

“The things that are affecting the outlook for inflation have varied,” Poloz said. “There has been no shift in what we care about, the profile of core inflation.”

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