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Bank of Canada Governor Stephen Poloz speaks during a news conference in Ottawa Jan. 22, 2014. (CHRIS WATTIE/REUTERS)
Bank of Canada Governor Stephen Poloz speaks during a news conference in Ottawa Jan. 22, 2014. (CHRIS WATTIE/REUTERS)

Poloz signals 'broadening' recovery Add to ...

It has been a long road back from the recession, but Bank of Canada Governor Stephen Poloz says a broad and sustained economic recovery may finally be at hand.

Mr. Poloz acknowledged Wednesday that the economy is stronger than he thought, in large part because exporters are feasting on the resurgent U.S. economy and a lower Canadian dollar.

Why the BoC is seeing new signs of optimism in Canada’s economy (The Globe and Mail)

As expected, the central bank kept its key interest rate unchanged at 1 per cent, extending the longest period of rate stability since the early 1950s.

“Canada’s economy is showing signs of a broadening recovery,” the central bank said in its final rate-setting announcement of 2014. “The hoped-for sequence of rebuilding that will lead to balanced and self-sustaining growth may finally have begun.”

That has been the strongest indication from the bank since the recession began in 2008 that the economy is starting to fire on all cylinders. But the generally optimistic tone was tempered by a number of key negatives, keeping the central bank officially neutral about where interest rates are headed next.

The bad side of the economic ledger includes cheaper crude that will weigh on both growth and inflation, a weaker global economy and persistent labour market slack.

The central bank also ratcheted up its warnings about high household debt loads, saying they pose a “significant” threat to financial stability.

“On net, the statement was cautiously optimistic,” said Emanuella Enenajor of Bank of America Merrill Lynch in New York. “They put more emphasis on recent positive growth developments.”

And that means pressure to eventually raise the bank’s overnight lending rate is starting to build.

“The case for an overnight rate hike continues to solidify,” said Bill Adams, senior economist at PNC Financial Services, who expects a hike in mid-2015.

The statement pointed out that two key ingredients are starting to fall into place – increased business investment and employment. The central bank also highlighted recent tax breaks by the federal government.

The Bank of Canada also said the output gap – a key measure of excess capacity in the economy – is smaller than it estimated less than two months ago.

Bank of Nova Scotia economist Derek Holt said in a research note that Mr. Poloz may be “buying time” with his decidedly mixed assessment of economic conditions as he waits to see whether the oil-price slump is sustained and what impact that may have on oil-patch investments.

Oil is “potentially a big game changer” for the economy that could weigh heavily on inflation, pointed out Laurentian Bank’s Sébastien Lavoie. Without the downward pressure on consumer prices from oil, rate hikes would likely come much sooner, he said.

During a conference Wednesday evening in Toronto, Mr. Poloz said lower oil prices would shave a third of a percentage point off economic growth next year. That was slightly higher than the quarter of a point he said in October. A lower oil price “reduces the amount of income flowing into Canada, but in the short term it’s good for consumers,” he said.

At a 2.4-per-cent pace in October, inflation is running faster than the central bank forecast earlier. But Wednesday’s statement said that is mainly due to temporary factors, such as the lower Canadian dollar, and sector-specific conditions that have driven up meat and telecommunication prices.

The consensus among economists is that the bank will start pushing up its key overnight lending rate in the fourth quarter of 2015, or a few months after the U.S. Federal Reserve starts tightening. It would mark the first increase by the Bank of Canada since September, 2010, when Mark Carney was governor.

The statement also underscored the bank’s continuing concern about the job market. This is despite the fact Canada’s labour market has improved in recent months, with back-to-back job gains this fall and an unemployment rate ebbing to 6.5 per cent, the lowest in nearly six years.

But the central bank has repeatedly said the jobless rate may be overstating improvements in broader labour market conditions. Other measures of the health of the market – such as wage growth, participation rates and long-term unemployment – may still be suggesting slack.

Annual wage growth slowed to 1.9 per cent for permanent workers in October, below the rate of inflation. The number of hours worked is little changed from a year ago, up 0.4 per cent. And the country’s participation rate, still at 66 per cent, is the lowest in nearly 13 years.

With reports from Tavia Grant and Lucas Kawa in Toronto

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