Poloz Rate Hike Is Miles Away With Consumer Momentum Uninspiring

Canadian households are making a bland contribution to an economic recovery battered by slumping crude oil prices, keeping the central bank stuck as the U.S. moves toward raising interest rates.

Consumer price inflation remained at the bottom of the Bank of Canada’s 1 percent to 3 percent target band for a second month in October, Statistics Canada said Friday, while September retail sales fell 0.5 percent.

Governor Stephen Poloz has cut interest rates twice this year to boost spending as energy exports and investment plunged and gross domestic product shrank in the first half of the year. With crude oil falling to $40 a barrel this week, signs of a less-than-enthusiastic consumer leave the world’s 11th largest economy in need of continued stimulus.

“The numbers don’t look great,” and the bank is “miles” away from a rate increase, said Benjamin Reitzes, a senior economist at BMO Capital Markets in Toronto. “Growth just isn’t picking up the way they would like it to.”

Canada’s dollar was little changed at C$1.3338 per U.S. dollar at 11:29 a.m. Toronto time. Federal government bond yields fell, with securities due in five years down 2 basis points to 0.92 percent.

Gas Prices

Retail sales had risen four straight months to a record high before the September decline. The fall was a mix of lower gasoline prices that can leave more money for consumers to spend on other items and a broad decline in purchases on everything from new cars to clothing and sporting goods.

Besides the Poloz rate cuts to 0.5 percent, Liberal Finance Minister Bill Morneau presented revised fiscal figures Friday to account for lower growth, setting the stage for a later budget he says will focus on stimulus to revive growth.

“There is still a need for fiscal and monetary stimulus in the Canadian economy,” said David Watt, chief economist at HSBC Holdings Plc’s Canadian unit in Toronto. “We are in a period of subdued growth, we don’t have much traction on pricing and the Canadian economy still needs support to come from somewhere.”

Consumer prices have lagged the Bank of Canada’s 2 percent target all year, a reflection of slack that Poloz says will take until around mid-2017 to use up.

At the same time, core inflation has remained above 2 percent since August 2014 as a weaker Canadian dollar makes imports more expensive. Core prices advanced 2.1 percent in October from a year earlier.

Fed Meeting

The Bank of Canada said the underlying trend of inflation is between 1.5 percent and 1.7 percent, according to its October Monetary Policy Report. That forecast also showed economic growth quickening to 2 percent in first quarter of next year as non-energy companies gain momentum.

With U.S. Federal Reserve meeting minutes this week signaling a December rate increase, further slides in Canada’s recovery leave open the chance Poloz may have to consider a rate cut before he tightens, Watt and Reitzes said.

“One of the key props driving the Canadian economy the past few years is no longer doing as much,” Watt said of consumers. “I still see strong arguments for the Bank of Canada to consider easing rates further.”

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