Poloz Sees Grim Side of Data in Holding Canada Rates Steady

  • Policy makers cite persistent slack, divergence with U.S.
  • BoC calls inflation effects of higher energy prices temporary

Stephen Poloz

Photographer: David Kawai/Bloomberg

Never mind the bright side.

The Bank of Canada kept alive its downbeat tone in a rate decision Wednesday, choosing to highlight the grimmer aspects of recent indicators that have also shown robust job gains and higher inflation.

Canada’s central bank pointed out persistent economic slack, global uncertainties and divergence with the U.S. as it left its benchmark interest rate unchanged at 0.5 percent -- and listed weakness in the labor market, inflation and exports.

“The Bank of Canada maintained a similar tone in its rate statement today,” Mark Chandler, head of fixed-income strategy at Royal Bank of Canada, said in a note to investors, “even though activity indicators to close 2016 and in early 2017 have been generally stronger than anticipated.”

Governor Stephen Poloz, wary of investors getting too far ahead of themselves pricing in rate hikes, has been keen to point out how much weaker his country’s economy is relative to the U.S. and the risks associated with policy change under President Donald Trump.

Canadian bond yields have increased in recent months along with those in the U.S. The country’s currency has also gained against the U.S. dollar this year, as higher oil prices and a recovering American economy outweigh concerns about the potential hit to Canada’s competitiveness. The loonie fell after the announcement, and traded down 0.3 percent to C$1.3346 versus its U.S. counterpart at 2:49 p.m. Toronto time. It’s down about 2 percent in the past three days.

According to the statement --  at 255 words, the shortest of Poloz’s tenure -- policy makers are “looking through” the recent pick-up in consumer prices that saw inflation rise to the highest in more than two years, citing the temporary impact of rising energy prices. In fact, other inflation measures that exclude energy show a different picture, they said.

Erik Hertzberg/Bloomberg

“The Bank’s three measures of core inflation, taken together, continue to point to material excess capacity in the economy,” policy makers said.

It was the same tone from the central bank on labor data, which has shown average employment growth of about 40,000 since August, more than four times the pace the previous 12 months. Instead, the central bank chose to focus on slow wage growth, which by some measures are at the slowest since at least 2003.

“While there have been recent gains in employment, subdued growth in wages and hours worked continue to reflect persistent economic slack in Canada, in contrast to the United States,” the bank said.

‘Significant’ Uncertainties

While no references were made to U.S. policies, as was the case in the last statement in January, the Bank of Canada Wednesday reiterated the theme of “significant uncertainties” that it has been playing prominently in its narrative. For a third straight statement, the Bank of Canada also pointed to continued divergence with the U.S. economy.

“The Bank’s Governing Council remains attentive to the impact of significant uncertainties weighing on the outlook and continues to monitor risks outlined” in the last monetary policy report, it said.

On the positive side, the Bank did highlight an improving outlook for growth for the Canadian and global economies, but even here pointing out the development was expected and that exports continue to face “competitiveness challenges.”

— With assistance by Erik Hertzberg

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