Bank of Canada says low rates will ‘mitigate’ shock of battered oil prices

OTTAWA — If Stephen Poloz got his messaging right, the Bank of Canada is putting further interest rate cuts solidly on the sidelines.

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The central bank governor on Wednesday sent his strongest signal yet that the economy needs more breathing space to absorb January’s surprise drop in lending costs, which Mr. Poloz characterized at the time as “insurance” against the negative impact of plunging oil prices.

Now, policymakers are suggesting that improved financial conditions should “mitigate” the damage from the oil shock, and that there is no need to tighten rates again, at least not now.

Instead, the bank is leaving its overnight rate — which guides lending levels between financial institutions — on hold at 0.75%, saying “we judge that the current degree of monetary stimulus is still appropriate.”

“Financial conditions in Canada have eased materially since January, in response to the bank’s recent monetary policy action and to global financial developments,” the bank said Wednesday.

“These conditions will mitigate the negative effects of the oil price shock, further boosting growth through stronger non-energy exports and investment.”

Only recently, most analysts had been anticipated another rate cut in the coming months — until, that is, Mr. Poloz dispelled the notion last week when he said the previous move “buys us some time” to judge how the economy would react to the drop in borrowing costs.

“As much as [Mr.] Poloz seems to be opposed to forward guidance, he did a good job of giving some forward guidance last week,” said Ken Wills, senior corporate dealer at CanadianForex.

“I don’t think there were a lot of surprises, which is a good thing for Canada,” he said, adding that the markets “look to have a good portion of it [the bank’s outlook] priced in.”

On Wednesday, the central bank said oil was back on track with the expected range noted in its quarterly Monetary Policy Report, released Jan. 21 along with the surprise rate-cut decision.

“Crude oil prices are close to the bank’s MPR assumptions.”

That outlook had pegged West Texas Intermediate, the U.S. benchmark, at US$55 a barrel, with Brent crude from the North Sea trading around the US$60 level.

WTI added US$1.01 to US$51.53 a barrel Wednesday, while Brent crude settled at US$60.71. The Canadian dollar, meanwhile, gained US0.48¢ to US80.54¢.

“The oil-price shock had a modest early impact on aggregated demand, and a larger effect on income,” policymakers said.

”The bank continues to expect that most of the negative impact from lower oil prices will appear in the first half of 2015, although it may be even more front-loaded than projected in January.”

It has forecast economic growth of 1.5% between January and March, as well as in the second quarter.

Douglas Porter, chief economist at BMO Capital Markets, questioned the central bank’s outlook for “stronger non-energy exports and investment.”

“That investment comeback is keeping itself very well disguised. We, in fact, had a flat performance for business investment last year. Almost certainly, business investment is going to fall this year because of the deep drop in spending in the energy industry,” he said.

“Exports, yeah. They stumbled in the fourth quarter, but they were solid in 2014. There’s probably some grounds for optimism on that front.”

Gordon Isfeld | March 4, 2015

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