Central bank to hold rates amid strong U.S. growth

Bank of Canada governor sees even better performance ahead for American economy

Bank of Canada Governor Stephen Poloz said his January interest-rate cut seems sufficient to put the economy back on track amid rebounding oil prices, and signalled the biggest risk to his forecasts may be U.S. outperformance.

“The U.S. economy has great fundamentals,” Poloz said during a talk Monday at the Bloomberg Americas Monetary Summit in New York. “I think it’s going to pop and we’ll have performance there that is a lot stronger than everyone’s expecting.”

Poloz became the first Group of Seven central banker to ease monetary policy in response to the drop in oil prices, cutting the key rate in January to 0.75 per cent. He called it “insurance” against the effect of the downturn. In a statement last week, Poloz suggested the worst of the oil shock may be over, and policy-makers now consider the biggest risk to their outlook a U.S. economy that surpasses expectations.

“That’s another shock that would happen and you would re-evaluate, in the context of those oil prices, whether you would need to adjust your policy path,” Poloz, 59, said during a panel discussion with Bloomberg’s Erik Shatzker.

The surprise Jan. 21rate cut “seems to be about right to restore our track for the Canadian economy for the next year or so and get the output gap to close late in 2016,” Poloz said. “The amount of insurance was just about the right amount.”

His comments Monday are consistent with what is perceived by investors as a less dovish tone from the central bank in recent weeks. Yields on three-month bankers’ acceptances, a benchmark for short-term business loans, climbed to 1.01 per cent after Poloz’s comments, the highest since he cut rates.

“Poloz sounds as if he’s done for now, although upcoming data will be key,” said Thomas Costerg, a New York-based economist at Standard Chartered Bank, who forecast easing

“Our biggest risk, I think today, is the U.S. economy will prove to be quite a bit stronger than most of us are assuming.” STEPHEN POLOZ BANK OF CANADA GOVERNOR

at the start of the year. “Overall a rather bullish stance, particularly on U.S. growth — and a significant belief that the rising U.S. tide will lift the Canadian boat.”

At the time of the rate cut, the data on which the central bank was making its decision was uncertain, Poloz said. Oil prices have since pared losses and, combined with monetary easing globally that has helped lower long-term bond yields, Canada’s interest rates have become appropriate.

“We know a lot more today than we knew in January,” said Poloz, noting the central bank has stopped using the word “insurance” to describe its policy move. “Our biggest risk, I think today, is the U.S. economy will prove to be quite a bit stronger than most of us are assuming.”

In the central bank’s April 15 monetary policy report, Poloz signalled the worst of the oil-price shock to the economy may be over, with improvements ranging from early signs of labour-market strength to gains in the non-energy exporting sector. That helped push the Canadian dollar up 2.6 per cent last week versus its U.S. counterpart, the biggest weekly increase since December 2011.

Interest-rate increases by the U.S. Federal Reserve would be “positive” because they would signal a stronger American economy, which would create a positive “spillover” for Canada, Poloz said.