Poloz's Rate Pause on Modest Canada Growth May Last Into 2017

  • Poloz decision Wednesday may back view of steady rates to 2017
  • Economy struggling with oil shock and lagging factories

Bank of Canada Governor Stephen Poloz will probably keep his key lending rate on hold Wednesday, as rising non-energy exports offset lingering damage from an oil shock to keep the economy on a path for modest growth over the next year.

Poloz will leave the key rate at 0.5 percent in a decision due at 10 a.m. in Ottawa, say all 33 economists in a Bloomberg survey, and some including Brian DePratto at Toronto-Dominion Bank predict he’ll be on hold into 2017. A government report Tuesday showed third-quarter shipments of automobiles and parts rose 5 percent and of consumer goods climbed 8.7 percent as the effects of a weaker currency begin to filter through the economy, limiting the need for further stimulus.

The gains in non-energy exports will help sustain “modest” economic growth of about 2 percent and keep Poloz on hold until mid-2017, said DePratto. “It’s going to be a very slow adjustment process.”

Even with the exchange rate boost, Canada’s economy has failed to generate durable enough growth to lift inflation back to the central bank’s 2 percent target. Gross domestic product expanded in the third quarter at a 2.3 percent pace, Statistics Canada reported Tuesday, after contracting in the first half.

It’s an economic reality companies like excavator Badger Daylighting Ltd. are adjusting to by taking advantage of a weaker exchange rate to sell services south of the border. Calgary-based Badger, which owns about 1,000 trucks that use water pressure and suction to dig down and expose pipes and cables, sent trucks to the U.S. to fill contracts and dodge the oil shock. The company, which does similar work for utilities and municipal governments, doesn’t see domestic growth picking up anytime soon, says Badger Chief Financial Officer Jerry Schiefelbein.

“There certainly are tough times in 2016 still ahead of us,” Schiefelbein said in a telephone interview.

Layoffs and canceled investments at resource companies in the province of Alberta such as Talisman Energy Inc. have accounted for much of the damage this year in Canada, the Group of Seven’s biggest oil exporter. At the same time, monthly figures show Canada’s factory sales have fallen the last two months through September to C$51.1 billion, below a 2014 peak of C$53 billion.

“We continue to expect the BoC will leave its policy rate unchanged at this week’s meeting and to keep its neutral policy stance,” Charles St-Arnaud, Canadian economist and foreign exchange strategist at Nomura Securities International, wrote in a research note. “There is a risk that the BoC could express some concerns about the continued lack of momentum in the domestic economy.”

Investors are still putting long odds on the prospect of another rate cut. Swaps trading around midday Tuesday showed about a 17 percent chance of a cut by the central bank’s March meeting. With the Federal Reserve poised to raise rates as early as this month, the difference is keeping the Canadian dollar at the lowest levels in more than a decade.

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