The chance of another interest rate cut is fading fast as Bank of Canada Governor Stephen Poloz shows growing confidence that the economy is on the mend, thanks in part to his surprise January move.
The central bank left its key overnight interest unchanged at 0.75 per cent Wednesday, indicating it is continuing to deliver an "appropriate" monetary stimulus to counter the economic damage caused by the oil price plunge.
"At present, we judge that the current degree of monetary stimulus is still appropriate," the central bank said in a statement, noting that inflation risks are now "more balanced."
The central bank pointed out that financial conditions have improved markedly since January, the Canadian dollar has fallen and economic conditions are unfolding largely as anticipated.
"Financial conditions have eased materially since January," it said. "This easing is reflected across the yield curve and in a wide range of asset prices, including the Canadian dollar."
And yet many economists are reluctant to completely rule out another rate cut, worried about being caught off-guard by the central bank's evolving public statements and Mr. Poloz's determination not to tip his hand.
"We would be careful in allowing ourselves to be led by a central banker who has explicitly spoken out against forward guidance," warned Bank of America Merrill Lynch economist Emanuella Enenajor. "We still see risks that the [Bank of Canada] eases this year."
The decision to hold rates steady comes six weeks after the bank shocked financial markets with a quarter-percentage-point cut on Jan. 21.
Mr. Poloz continues to surprise investors. On Wednesday, financial markets were pricing in a roughly 24-per-cent chance of another quarter-point rate cut when the bank makes its next rate announcement April 15. As recently as last week, the likelihood of a second rate cut was 70 per cent. On Tuesday, it was about 50 per cent.
The chance the bank will cut again is now more remote, but Mr. Poloz could well move if oil starts plunging again or inflation dives lower, Bank of Montreal chief economist Douglas Porter said.
"This does not fully close the door of the possibility of further rate cuts," Mr. Porter said.
Royal Bank of Canada economist Mark Chandler said Wednesday's statement suggests the bank may be "one and done," satisfied that its January reduction was enough.
The central bank said the combination of a cheaper dollar and lower interest rate are already mitigating the negative effects of the oil price shock, including a hit to incomes and overall demand in the economy.
It pointed out that it expects the shock from cheaper oil will be felt mainly in the first half of this year, but added that "it may be even more front-loaded than projected in January."
Last week, Mr. Poloz quashed growing expectations of another rate cut, suggesting that the bank had taken the "appropriate" amount of insurance against the damage caused by lower oil prices. Wednesday's statement largely stuck to the same message, repeating the appropriate phrase.
The central bank appears quite comfortable, both with its current forecasts and its monetary policy stance. The statement pointed out that crude prices, now at roughly $50 (U.S.) a barrel, are close to the assumptions it made in January and the global economy is "evolving broadly in line" with its forecast.
The full impact of the oil price plunge won't be known until economic indicators come in for the first few months of this year. Nonetheless, the central bank said the 2.4-per-cent growth in Canada's gross domestic product in the fourth quarter was "consistent" with its expectations and that conditions in the non-energy economy are improving.
"Data for 2014 as a whole suggest the anticipated rotation into stronger growth in non-energy exports and investment is well under way," the central bank said.