Why Canada's Poloz Kept Interest Rates Unchanged: Takeaway

  • Poloz sees pick up in non-energy exports on U.S. strength
  • Financial risks are hedging higher; oil is a `setback'

QuickTake: Canada's Next Step

Here is why Bank of Canada Governor Stephen Poloz  left interest rates unchanged even in the face of falling oil prices and expectations for another cut.

  • Poloz remains optimistic, holding firm about growth in China, the U.S. and globally. “While risks to the world outlook remain and have been reflected in sharp price movements in a range of asset classes, global growth is expected to trend upwards beginning in 2016.”
  • Poloz sees signs of a pick up in non-energy exports on the back of a weaker dollar, resilient jobs market and household spending growth.
  • Complex nature of restructuring from resources to non-energy exports makes outlook “uncertain.”
  • The bank is looking for Prime Minister Justin Trudeau to deliver. While not yet penciling in a boost from the budget, Poloz expects a fiscal jolt to growth from Trudeau’s pledge to run deficits and increase infrastructure spending.
  • Inflation matters. The Bank of Canada’s inflation outlook was little changed even with market turmoil. That’s what carried the day here.

There are risks:

  • Oil is a “setback,” with recent commodity declines slowing expected recovery and full capacity unlikely before the end of 2017
  • If oil falls further, companies will lose money even on their marginal costs, and that means they stop production.
  • Financial “vulnerabilities” continue to edge higher.
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