Bank of Canada Governor Stephen Poloz is grappling with the stresses of a hobbled export economy and low inflation.
The central bank Wednesday held to its neutral stance on the direction of future rate moves, even as it acknowledged that inflation is perking up and the U.S. recovery is gathering steam.
Mr. Poloz’s message is clear. Rates aren’t moving anytime soon in Canada because the central bank still sees too many economic risks, including low inflation, sputtering exports, a shaky housing market and a raft of global uncertainties from Ukraine to China.
“So bottom line: We are neutral at this stage, but we cannot rule out anything,” Mr. Poloz told reporters via video link from Toronto, where he was attending former finance minister Jim Flaherty’s funeral. Mr. Poloz added that a rate cut “can’t be taken off the table,” an eventuality that most economists say is unlikely.
The central bank held its key overnight interest rate at 1 per cent Wednesday, marking the 29th successive no-decision from the bank, stretching back to September, 2010.
Mr. Poloz, 58, insisted the bank is keeping its neutral stance on the direction of future rate moves, even as it acknowledged that inflation is perking up and the U.S. recovery is gathering steam.
“So bottom line: We are neutral at this stage, but we cannot rule out anything,” Mr. Poloz told reporters via video link from Toronto, where he was attending former finance minister Jim Flaherty’s funeral. Mr. Poloz added that a rate cut “can’t be taken off the table” – an eventuality that most economists say is unlikely.
Keeping rate cuts as a possibility is a way for Mr. Poloz to make sure Canada doesn’t get ahead of the United States as central banks gradually ease off their stimulus measures, suggested economist Avery Shenfeld of CIBC World Markets.
“The bank is trying to avoid changing its neutral stance for as long as possible,” Mr. Shenfeld said in a research note. “That’s an effort to retain the current valuation of the Canadian dollar, which it sees as important in promoting growth where it really wants to see it – in exports.”
Mr. Poloz, however, said the bank’s neutral stance is justified, pointing out that inflation will fade again unless exports and business investments pick up soon.
Economist Bill Adams of PNC Financial Services said Mr. Poloz’s preoccupation with weak exports is a “not terribly discreet reminder that he is all too happy to see a weaker Canadian dollar.”
Most economists expect the bank’s next move to be a rate hike, but not until mid-2015 and perhaps later. The bank’s overnight rate sets the tone for other borrowing costs, including home mortgages.
Mr. Poloz warned that unless exports and business investments pick up, inflation will fade again, leading to unusually weak inflation in 2015 and beyond. And while all the “ingredients” are in place for better exports, the rebound remains elusive, he added.
Analysts have suggested that Mr. Poloz has been actively “talking down” the Canadian dollar in recent months by playing up the weak economy and stressing the risk of disinflation. The Bank of Canada rejects that.
In the hours after the bank reaffirmed its neutral position, the Canadian dollar dipped nearly a cent – to 90.8 cents (U.S.) from 91.05 cents.
The Bank of Canada also released an updated quarterly forecast that shows the cheaper dollar and rising energy prices are pushing inflation closer to the Bank of Canada’s critical 2-per-cent target.
But much of this upward price pressure will be temporary, and Canada’s weak economy will keep less volatile “core” inflation – which excludes volatile items – persistently low until early 2016, the bank said. The bank attributed the slow price gains to intense retail competition and economic weakness. Core inflation won’t hit the bank’s 2-per-cent target until 2016, the report said.
The bank strives to keep inflation at or near a 2-per-cent target, moving its benchmark interest rate higher when prices rise too fast, and cutting when weak demand sends inflation lower.
The bank also slashed its forecast for growth in the first quarter to an annualized 1.5 per cent from 2.5 per cent – a period affected by bad weather and weak exports. The forecast for the rest of 2014 and 2015 remains largely unchanged, with growth expected to average 2.5 per cent a year.
The bank continues to fret about the slow pace of Canadian exports, which have been hit by a loss of market share in the U.S. and, more recently, harsh winter weather. The bank warned that exports will boost growth much less this year than it expected just three months ago. Canada’s share of U.S. imports of non-energy products has fallen to less than 22 per cent from nearly 29 per cent in 2000. Canada’s share of the U.S. energy market, meanwhile, has done almost exactly the opposite, rising sharply in the past three years.