Stephen Poloz warns impact of oil shock on economy may take years to work itself out

OTTAWA — Stephen Poloz readily admits Canada’s recovery from the 2008-09 recession “has been a long voyage, and it isn’t over yet.”

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But the Bank of Canada governor, often appearing the optimist, sees signs the country’s economy is gradually recovering — even amid the oil-price collapse and lingering concerns about the health of the global financial sector.

“We’ve been on a voyage of rebuilding since the Great Recession,” Poloz told a business audience in Charlottetown on Tuesday, in a speech titled “The Way Home: Reading the Economic Signs.”

“But the trip has been longer and more complicated than previous recoveries because of all the cross-currents acting on the economy,” he said, adapting nautical references to describe threats to monetary policy — something he has become well-known for since taking over from Mark Carney two years ago. “Not only are the headwinds of the global financial crisis still blowing, but now we’re also dealing with lower prices for oil and other key commodities, which previously were a key growth engine for us,” Poloz told the Greater Charlottetown Area Chamber of Commerce.

“The implications for income and investment, and the adjustments they’re causing across sectors and regions, may take years to work themselves out.”

Poloz also reiterated the view from the central bank’s quarterly Monetary Policy Report, published in April, that the oil-price shock “is proving to be faster than we first expected, but not larger.”

West Texas Intermediate crude has been trading around or slightly below the US$60 mark in recent weeks, still well up from the previous lows blamed on an over-supply of oil and resulting in prices being cut in half over the past year.
“It’s important to bare in mind that when we say ‘faster not bigger’ — it’s still not over. So, that’s an important subtlety too,” Poloz said during a news conference after his speech.

“The biggest uncertainty that we face, then, is how quickly is the shock over, in terms of going down now or does it still have further to go down. So, that’s the difference between ‘bigger,’ versus ‘faster,’” he said.

“The first quarter is what it is — we think around zero [per cent growth]. If there’s no further downdraft, then we think our forecast of a partial rebound will hold up.”

Benjamin Reitzes, senior economists at BMO Capital Markets, said the governor’s speech “maintained a cautiously optimistic tone.”

“The speech has no mention of the recent spate of weaker U.S. economic data and the resulting potential downside risks.”

Meanwhile, Poloz said in his speech that the bank’s two policy pillars — an inflation target of two per cent and economic output running at full capacity by the end of 2016 — remain on track.

“Our current best judgment is that the underlying trend of inflation is somewhere around 1.6 per cent to 1.8 per cent,” he said.

“You can be sure that the Bank of Canada will continue to work toward bringing the economy home, at full capacity and with inflation sustainably on target, so we can fulfill our mandate to support the economic welfare of all Canadians.”

Poloz surprised markets in January when he cut the central bank’s benchmark lending rate to 0.75 per cent from one per cent — where it had sat since September 2010 — citing the need for “insurance” against the negative impact of the oil plunge.

“The January interest rate cut is working,” he said, adding the reaction to the drop in the lending level “made financial conditions in Canada significantly easier.”

“The cut will benefit households with a mortgage, though this is partly offset by a reduction of income for savers.”

The central bank’s next interest rate decision will come May 27, and it is increasingly unlikely that any further policy stimulus will be announced any time soon.

Given the domestic economy is struggling to maintain sustainable growth — along with the U.S. showing surprising weakness, and the Federal Reserve’s anticipated return to rate hikes this fall appearing less likely — Canadian policymakers could find themselves with no option but to continue with lower borrowing levels for longer.

“It looks like it’s steady as she goes for Poloz and the BoC, as they wait to see more Canadian data before changing tack,” said BMO’s Reitzes.

Gordon Isfeld | May 19, 2015

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