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Bank of Canada governor Stephen Poloz appears at a press conference at the National Press Theatre in Ottawa on Wednesday, October 21, 2015. (Sean Kilpatrick/THE CANADIAN PRESS)
Bank of Canada governor Stephen Poloz appears at a press conference at the National Press Theatre in Ottawa on Wednesday, October 21, 2015. (Sean Kilpatrick/THE CANADIAN PRESS)

Poloz warns of oil shock’s effects as Bank of Canada holds lending rate Add to ...

Bank of Canada Governor Stephen Poloz is warning that the oil price shock could weigh on Canada’s economy for at least another two years.

The central bank kept its key overnight lending rate unchanged at 0.5 per cent Wednesday, after cutting it twice this year.

But the bank downgraded its economic outlook for next year and 2017, citing a “complex” transition away from the once-booming resource sector.

Bank of Canada downgrades economic outlook again (BNN Video)

After flirting with a recession earlier this year, the Canadian economy will grow just 2 per cent in 2016 and 2.5 per cent in 2017, the bank said in its latest monetary policy report. That’s down from previous forecasts of 2.3 and 2.6 per cent, respectively.

Low oil prices are continuing to sap business investment and put a dent in the value of Canadian exports, overwhelming some of the improvements elsewhere in the economy. The bank now expects spending in the energy sector to drop another 20 per cent in 2016, after a 40-per-cent drop this year.

Over all, lower business investment will knock 0.2 percentage points off growth in 2016, according to the bank.

“The complex adjustments to the decline in Canada’s terms of trade will continue to play out over the projection horizon,” the bank said in a statement. That horizon now extends to 2017.

Mr. Poloz said it will take up to two years for the recent rate cuts to work their way through the economy. “We need to be patient and let monetary policy do its work,” Mr. Poloz told reporters in Ottawa.

And he pointed out that the non-energy side of the Canadian economy is gaining steam, buoyed by those lower interest rates and the cheaper Canadian dollar.

Vast swaths of non-energy exports are in full recovery mode, according to a separate analysis of more than 4,000 exports, also released Wednesday by the bank. Exports of hundreds of items, including building products, aerospace and fabricated metal, have grown by at least 10 per cent a year since the recession.

“These findings suggest that the export recovery is taking hold and the Canadian export sector is showing some rebuild since the Great Recession,” the report said.

Mr. Poloz, who was appointed by the Conservatives in 2013, also said he looks forward to working with the incoming Liberal government. But he deflected questions about the impact of prime-minister-designate Justin Trudeau’s promise of three years of deficits to fund a mix of infrastructure spending and tax cuts.

“We’ll just have to just wait and see,” he said. “Stay tuned.”

The bank’s more sober outlook could delay eventual interest-rate hikes in Canada, just as the U.S. Federal Reserve appears poised to start raising rates. This could push the Canadian dollar even lower as investors seek higher returns in the United States. The Canadian dollar fell sharply following the release of Wednesday’s downgraded forecast, closing down 0.91 (U.S.) of a cent to 76.24 cents.

In July, the bank lowered its forecast for gross domestic product growth this year to 1.1 per cent from 2 per cent after the first-half stall.

More worryingly, the Bank of Canada warned that the potential growth rate of the economy may be weaker than expected because of “capacity destruction,” some of which may never come back. The result is that the potential growth of the economy is “likely to be in the lower part … of estimates” this year and next.

The price of crude had started to recover in recent months, but has since retreated again, hovering at around $45 a barrel.

The bank also acknowledged that economic “slack” has increased this year, delaying a return to full capacity – an indicator of when the central bank may need to push up interest rates. It now estimates that the economy won’t reach full capacity until “around mid-2017.”

Toronto-Dominion Bank economist Leslie Preston now expects the Bank of Canada to stay “comfortably on the sidelines” until the second half of 2017.

Over the past year, the bank has steadily pushed back the target date for when the economy will be firing on all cylinders – from early 2016 to mid-2017 now.

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