Central bank hints at further rate cut
Another quarter-point reduction expected to insure against volatile oil price, expert says
The Bank of Canada says it’s prepared to take action to help navigate the economic uncertainty tied to low oil prices as experts predict it could once again cut its trend-setting interest rate.
Senior deputy governor Carolyn Wilkins made the remarks in a speech in Ottawa on Tuesday — as many observers expect the central bank is preparing to drop its rate even further next month.
The Bank of Canada blindsided markets in January by lowering its overnight rate to 0.75 per cent from 1 per cent.
At the time, governor Stephen Poloz said the cut was needed as insurance for the “unambiguously negative” effects of plummeting crude prices on the oilexporting country’s economy.
In prepared remarks of her speech Tuesday, Wilkins said the central bank has the ability to move the inflation rate back up towards its 2 per cent target.
“If potential output growth turns out to be lower than we think, we have the tools to bring inflation back to target,” said Wilkins, who expects the Canadian economy to grow with help from the lower loonie and a stronger U.S. economy.
She predicted Canada’s non-energy sector will lead the growth.
Wilkins also indicated the central bank is monitoring job-market concerns, such as the low average number of hours worked and the high rate of involuntary part-time workers.
She said “prime-age” workers between 25 and 54 years old and young people between 15 and 24 years old remain underemployed.
The participation rate of prime-age workers in the labour force fell “substantially” last year, while the average duration of unemployment has been hovering close to its post-financial-crisis peak of around 21 weeks, Wilkins added.
“That is a long time to be unemployed,” she said in the prepared speech titled, Minding the Labour Gap.
The speech “reiterated what many already knew – the Bank of Canada is looking to the labour market for guidance in setting the path of monetary policy,” Randall Bartlett, senior economist at TD Economics wrote in a research note.
The Bank of Canada’s forecast is based on an oil price of $55 (U.S.) per barrel for West Texas Intermediate, Bartlett wrote. Oil is currently trading close to $50 per barrel.
As a result, “we expect that the Bank of Canada will take out additional insurance and reduce the overnight rate by a further 25 basis points at its upcoming interest rate announcement in March, 2015,” Bartlett wrote.
Meanwhile, Bank of Canada Stephen Poloz rejected speculation that he’s trying to boost growth by weakening the Canadian dollar.
“I honestly reject the notion that I’m talking down the dollar,” Poloz told re- porters in Istanbul, where he’s attending a meeting of Group of 20 finance chiefs. “It’s not about what we did. It’s about how the economy has behaved.”
The Canadian dollar has lost 18 per cent against the U.S. dollar since Poloz became governor in June 2013. It’s fallen 3.2 per cent since he cut interest rates on Jan. 21 by a quarter of a percentage point.
Poloz said since he was appointed, the economy has performed below policy makers’ expectations even before the decline in oil prices.
“It’s only by being open about that and people seeing it happening and, oil prices declining on top of that, that the dollar has moved,” Poloz said. “The oil-price move, my goodness, oil prices have got to be responsible for 99 per cent of what we’ve seen.”
Poloz said it had taken analysts some time to fully understand the deep and immediate impact the oil price shock would have on the economy, while the benefits of falling energy costs would only filter through the economy with a lag. With files from Star wire services and Madhavi Acharya-Tom Yew