OTTAWA – Bank of Canada governor Stephen Poloz says he has not ruled out a future cut to interest rates despite evidence disinflationary pressures appear to be waning and his belief that the global and Canadian recoveries are picking up steam.
“We are neutral, that mean’s a rate cut cannot be taken off the table at this stage,” Poloz said during a news conference Wednesday. “It will depend on the data flow.”
Poloz made the comment after the central bank decided to keep its trendsetting overnight rate at one per cent, where it has been since September 2010.
The bank also pared back its estimate for first-quarter economic growth by a full point to 1.5 per cent — mostly because of the severe winter weather that began in December — and full-year 2014 growth to 2.3 per cent from 2.5.
Both moves were negative for the Canadian dollar, which slipped 0.37 of a cent to 90.73 cents US following the announcements.
That appears to be what Poloz wanted, said Bank of Montreal chief economist Doug Porter, who noted the bank’s report appeared to stress the negative, even while saying a strengthening U.S. recovery should benefit Canada. That’s because one ingredient for economic growth in Canada is a lower loonie that makes exported goods more competitive south of the border.
“He basically did not want to come off upbeat. I noticed he downplayed that inflation has been a bit higher than expected,” said Porter.
“I think what they (bank officials) were trying to say is … our weaker Canadian dollar will support growth and I think it was that comment that cut the legs out from under the currency today.”
In its tone, the Bank of Canada’s new monetary policy report appeared more positive than the bottom line, reflecting a growing confidence in the global economic recovery and less concern about persistent low inflation and an overly hot housing sector.
Still, Poloz stressed in a teleconference from Toronto — where he was to attend the afternoon funeral of former finance minister Jim Flaherty — that considerable risks remain, including the possibility that Canadian exports won’t recover fully and the potential for a political shock to the world economy from Ukraine’s difficulties with Russia.
While he wouldn’t rule out a rate cut if needed, analyst Jimmy Jean of Desjardins Capital Markets guessed Poloz would likely have also admitted he wouldn’t rule out a rate hike either if he had been asked.
“I don’t think we’re close to either scenario,” he said.
Most economists are pencilling in a rate increase in the summer or fall of 2015, but say the chances of an actual cut from an already low setting are receding with each month of positive economic data, including more normal levels of inflation. The last reading was 1.1 per cent and analysts are expecting Statistics Canada to report on Thursday an annualized rise of about 1.6 per cent in the consumer price index in March.
The central bank has set an ideal target of annual inflation at 2.0 per cent but considers it acceptable within a range of between 1.0 per cent and 3.0 per cent.
Poloz went to great lengths Wednesday to say that inflation remains weak — despite expectations it will approach the desired two per cent target within the next few months. He said the near-term return of inflation will be due to temporary factors such as higher energy prices, but underlying inflation likely won’t likely return to the target rate until 2016.
Still, the bank’s new outlook as outlined in the monetary policy report suggests Poloz and his deputy governors are becoming a little more convinced in the growth story.
The first-quarter slowdown is already looking like old news and the bank expects the second quarter to pick up to 2.5 per cent growth, and for the economy to average 2.5 per cent annual growth in 2015 as a whole.
The most encouraging aspect of the report is what the bank’s governing council sees happening to exports.
Rising energy prices mean oil and gas exporters will do even better than previously expected, the bank says. But it is also encouraged that manufacturers will soon see a lift, particularly now that the Canadian dollar has lost about 10 per cent of its previous value since February 2013.
“Canada’s non-energy range of export sectors are expected to benefit, including those linked to the U.S. construction activity, such as logging and building materials,” the bank says. “As U.S. investment in machinery and equipment strengthens, export sectors such as industrial, electrical and electronic machinery and equipment, computers and aircraft, should strengthen.”
“Obviously our story hinges critically on the export outlook,” said Poloz. “We obviously have what looks like a soft landing emerging in housing, so it’s critical we get a pickup of momentum in exports which will then be followed by a pickup of investment. And those two shifts will give us sustainable growth trend.”
Poloz said all the ingredients are there for an export sector recovery, but noted those ingredients have been present “for quite a while and we have not seen a response yet.”
After highlighting the dangers of high consumer debt and frothy house prices through most of 2012 and 2013, the bank says that while the danger has not fully passed it is now less worried about a severe correction that would sideswipe the economy.
“Recent developments are in line with the bank’s expectation of a soft landing in the housing market and stabilizing debt-to-income ratios for households,” it said.
In a separate section on the likely impact of the ballooning shale oil extraction activity in the United States, the bank said the increased supply may depress crude prices somewhat but won’t significantly deter Canada’s oilsands production.
“Since shale oil is often as expensive to produce as oil from the Canadian oil sands, only the most marginal and costly Canadian projects would be affected,” it says.