HOLDING THE RATE
Poloz sticks to 0.75%
The damage wrought by the oil- price collapse may have had a “faster” but not necessarily “bigger” effect on the economy than was first thought.
The Bank of Canada acknowledged Wednesday the country’s output was flatlining for most — if not all — of the first quarter, given that the fallout from the crash in crude appears to have been more “front- loaded” than predicted just a few months ago.
For the central bank’s policymakers, this will mean staying the course for now at current ultralow interest rates and assessing the impact of still- low oil costs along the way.
“The key issue for us is whether the oil- price shock is having a bigger effect, or just a faster effect. That is the key thing that we have to assess,” governor Stephen Poloz told reporters following the bank’s decision to keep its trendsetting lending rate on hold.
Borrowing costs have been at 0.75 per cent since January, when Poloz announced a surprise drop from 1 per cent — a level that had been a fixture of the bank’s monetary policy since September 2010.
Most economists had already begun pushing back thoughts of another impending rate cut, even though oil is still trading just above $ 50 US a barrel.
“While we believe that the economy is likely to be weaker than the BoC expects, the fact that the Bank of Canada remains confident that the economy will recover strongly from the oil shock suggests to us that the likelihood of a rate cut has diminished substantially,” said Charles St- Arnaud, an economist at Nomura Global Economics in London.
“We now think the Bank of Canada is unlikely to cut rates over the coming months,” said St- Arnaud, who has also worked at the Bank of Canada.
As such, there were few surprises in the bank’s closely watched quarterly Monetary Policy Report, which accompanied the rate- decision statement and is the de facto working document for decisionmaking during the next three months.
Still, the price of crude — Canada’s biggest export, which has fallen 50 per cent since the summer — and the timing of any sustained recovery remain the wild cards for forecasters.
Those uncertainties have led Poloz and his policy- makers to pull back on their economic growth forecasts for this year.
In fact, they believe oil- fuelled concerns will translate into stalled growth between January and March. Wednesday’s Monetary Policy Report slashed the firstquarter forecast to zero from the January estimate of 1.5 per cent. But for the second three months of 2015, growth was pushed up to 1.8 per cent from the previous target of 1.5 per cent.
“Obviously our forecast for Q2 cannot be considered a sure thing — forecasting never is. We have to weigh those things as we go through the next few weeks,” Poloz said. “And it is our No. 1 risk as forecasters. So, stay tuned.”
Meanwhile, the bank expects the third quarter to produce 2.8 - per cent growth, followed by 2.5- per cent in the last three months of this year.
It is now also calling for a 1.9- per cent advance overall in 2015, down from a forecast of 2.1 per cent in January and considerably lower than the 2.5 per cent recorded for all of 2014.
In the Monetary Policy Report, policy- makers said “the impact of the oil- price shock on growth will be more front- loaded than predicted in January.”
As well, “underneath the effects of the oil- price shock, the natural sequence of stronger non- energy exports, increasing investment and improving labour markets is progressing.”
The bank is more optimistic about 2016, raising the outlook to 2.5 per cent from 2.4 per cent in the January forecast. Farther out, the prediction is for 2.0 per cent growth in 2017.
“The bank has not fundamentally shifted its view on the overall impact of the oil shock,” said Douglas Porter, chief economist at BMO Capital Markets.
“They continue to believe the output gap will be gone by end2016 and inflation will be close to two per cent by that time,” he said. “Now the key is whether the economy continues to disappoint in the months ahead. If it looks to seriously undershoot the bank’s expectation of nearly 2.5- per- cent growth over the next three quarters, another rate cut could be back on the table.”