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Bank of Canada’s Poloz says impact of oil drop still unclear

Analysts change their tune on central bank rate cut expected Mar. 4.


LONDON, Ont. — Canada’s top banker says the economic impact on the country from the recent drop in oil prices is still unclear.

But Bank of Canada governor Stephen Poloz says the decision by the bank to lower its key policy interest rate last month should buy some of the time needed to figure out how best to reach stability.

Poloz told a university audience in London, Ont., the quarter-point rate cut, which reduced the central bank’s key rate to 0.75%, has given the policy-makers more confidence that the economy should be back on a more sound footing by the end of next year, rather than some time in 2017.

Still, Poloz says uncertainty remains because while the oil price shock hurt the economy almost immediately, the advantage of a lower Canadian dollar and increased consumer spending on things other than lower-priced fuel, will only happen gradually.

And he warned lower oil prices mean lower Canadian income, which will worsen the household debt-to-income ratio.

Poloz made the comments in a speech at Western University.

Following the central bank governor’s comments, analysts expect the chance of an interest rate cut next week has been reduced.

“The oil price shock itself is of uncertain size,” Poloz said. “So, the downside risk insurance from the interest rate cut buys us some time to see how the economy actually responds.”

Poloz said later in a question-and-answer session he believes the bank took out sufficient insurance at its January policy meeting given the economic environment at the time.

And he noted that oil prices have, by and large, stabilized at a level at which the bank had set in making its January announcement.

Many economists have predicted the Bank of Canada would likely cut rates by a further quarter point at its March 4 policy meeting. Now, they appear to be leaning toward a wait-and-see position.

“Another curve ball from Bank of Canada Governor Poloz has sharply reduced the odds of a rate cut at next week’s meeting,” BMO Capital Markets senior economist Benjamin Reitzes said in a statement.

“Though there are still some key economic data before the policy announcement that could change the equation.”

Statistics Canada is expected to report January inflation numbers on Feb. 26 and gross domestic product data for December is expected March 3, the day before the rate announcement by the central bank.

Scotiabank and TD Economics also recast the odds of a rate cut.

“On balance, it appears that a rate cut next Mar. 4 is not set in stone,” said TD economist Brian DePratto.

The January rate cut, which reduced the central bank’s overnight rate to 0.75%, Poloz said has given policy-makers more confidence the economy should be back on a more sound footing by the end of next year, rather than some time in 2017.

Still, uncertainty remains because while the oil price shock hurt the economy almost immediately, taking advantage of a lower Canadian dollar to boost exports, and increased consumer spending on things other than lower-priced fuel, will only happen gradually, said Poloz.

And he warned that lower oil prices mean lower Canadian income, which will worsen the household debt-to-income ratio.

In response to questions after the speech to his alma mater, Poloz said he sees near-term positives in Canada’s economy that could impact the central bank’s decision making, including the price of Brent crude oil stabilizing in the range of $60 US.

And he told reporters the economy might not see the positive effects of lower oil prices and interest rates until “later this year.”

The governor also called for a reinvention of central banking that integrates both inflation and financial stability risks.

Poloz said the global financial crisis and recession showed that low and stable inflation does not guarantee financial stability.

“We need to take account of a wider range of economic and financial consequences while targeting low inflation,” he said.

© 2015 The Canadian Press

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