Canada must let neg­a­tive forces be­hind low dol­lar, oil prices play out: Poloz


The Bank of Canada says over­com­ing the eco­nomic suf­fer­ing in­flicted by the com­mod­ity-price shock es­sen­tially boils down to one main op­tion: ride it out.

Stephen Poloz, the cen­tral bank gov­er­nor, said Thurs­day that no sim­ple pol­icy re­sponse will fix the prob­lem, al­though dam­ag­ing fac­tors like the steep slide in oil prices can be mit­i­gated - to a point.

“The forces that have been set in mo­tion sim­ply must work them­selves out,” Poloz said in a speech at Ot­tawa City Hall.

“The econ­omy’s ad­just­ment process can be dif­fi­cult and painful for in­di­vid­u­als, and there are poli­cies that can help buf­fer those ef­fects, but the ad­just­ments must still even­tu­ally hap­pen.”

Poloz pointed to Canada’s flex­i­ble ex­change rate, which closely fol­lows the ups and downs of crude prices, as one of those “mi­nor shock ab­sorbers” that help soften the blow for some parts of the econ­omy.

With oil prices ex­pected to re­main low for some time, Poloz sug­gested the weak loonie will per­sist as the crude-ex­port­ing coun­try ad­justs to the new re­al­ity.

“It’s not a co­in­ci­dence that the Cana­dian dol­lar to­day is about where it was back in 2003, 2004. Oil prices are also about where they were back then,” said Poloz.

On Thurs­day, the loonie was trad­ing around 71 cents U.S., about where it was in 2003.

Oil prices ducked un­der US$34 a bar­rel this week and are at their low­est level since 2008. Poloz noted that crude was around US$25 per bar­rel in 2002.

Al­most like it was 2002 all over again, Poloz said the com­plex eco­nomic changes have led to higher con­sumer spend­ing, fall­ing em­ploy­ment and lower in­vest­ment in the re­sources sec­tor.

Since mid-2014 — when oil prices started to free-fall — Poloz said the coun­try has lost more than $50 bil­lion in na­tional in­come, or about $1,500 per Cana­dian, as mea­sured by the terms of trade.

How­ever, the coun­try’s eco­nomic data has de­tected signs of re­cov­ery, he said. They in­clude slowly emerg­ing off­sets of ris­ing em­ploy­ment and in­vest­ment in non-re­sources sec­tors.

Fol­low­ing his speech, Poloz told a news con­fer­ence that adapt­ing to such a shock takes time - usu­ally three to five years.

Poloz has taken steps to dull the sting of the oil slump. Un­der his lead­er­ship, the cen­tral bank low­ered its trend-set­ting in­ter­est rate twice in the last 12 months to help limit the im­pact.

On Jan. 20, the Bank of Canada will make an­other rate an­nounce­ment, though most ex­perts ex­pect Poloz to stand pat for the time be­ing. The bank will also release a fresh bas­ket of eco­nomic fore­casts that day in its quar­terly mon­e­tary pol­icy re­port.

Poloz re­it­er­ated Thurs­day that the Bank of Canada also has a num­ber of un­con­ven­tional tools at its dis­posal to limit any sig­nif­i­cant threats to the fi­nan­cial sys­tem or the in­fla­tion rate. The op­tions in­clude low­er­ing the bank’s trend-set­ting in­ter­est rate into neg­a­tive ter­ri­tory.

The new fed­eral gov­ern­ment has also promised to in­ject some life into the econ­omy by pump­ing bil­lions into in­fra­struc­ture spend­ing over the com­ing years.

Poloz was also asked Thurs­day about the po­ten­tial eco­nomic ben­e­fits of such in­vest­ments.

Speak­ing in French, he called pub­lic in­fra­struc­ture spend­ing an “im­por­tant in­gre­di­ent” for eco­nomic growth, but said it’s still too early to know how quickly the fed­eral cash could pro­duce ben­e­fits for the econ­omy.

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