Wednesday, 15 April 2015

Bank of Canada Leaves Rate Unchanged as Oil Shock Fades

Bank of Canada Governor Stephen Poloz
Bank of Canada Governor Stephen Poloz billed his January cut as “insurance” for the Group of Seven’s 
biggest crude exporter and since then reports on output, employment and housing have all beaten 
economist forecasts. 

Photographer: Cole Burston/Bloomberg
by Greg Quinn | 6:00 PM GST | April 15, 2015

The Bank of Canada kept its key interest rate unchanged and said inflation will meet the bank’s target sooner than previously forecast amid signs the damage from an oil-price shock may already be fading.

Policy makers held the benchmark rate on overnight loans between commercial banks at 0.75 percent for a second straight meeting after a surprise January cut. Growth will quicken to a quarterly average of about 2.5 percent through mid-2016 with gains in non-energy exports and employment returning in a few months as the “dominant trend.”

“The impact of the oil price shock on growth will be more front-loaded than predicted in January, but not larger,” policy makers led by Governor Stephen Poloz said in a statement Wednesday from Ottawa. “Risks to the outlook for inflation are now roughly balanced and risks to financial stability appear to be evolving as expected.”

The Bank of Canada cut its forecast for economic growth this year to 1.9 percent from 2.1 percent on a drop in investment linked to cheaper oil. It also brought forward a projection for when inflation will return to the 2 percent target to the first quarter of 2016 from the final three months of next year. The bank reiterated the world’s 11th-largest economy will return to full output by the end of 2016.
‘Jury Out’

The currency reversed losses after the decision, trading 0.2 percent stronger versus the U.S. dollar at 10:06 a.m. in Toronto. Canada’s dollar is still down 12 percent against the greenback over the past year. The yield on government benchmark two-year yields rose 4 basis points to 0.55 percent.

All 22 economists in a Bloomberg survey expected no change today. Investors have been betting on another rate cut later this year. If Poloz only cuts once to get through this weak patch, it would mark the first time in at least 20 years a policy change was confined to one move.

“The jury is still out” on whether another rate cut is needed, said Mark Chandler, head of fixed-income research at RBC Capital Markets in Toronto. “It’s the data coming in that changes the ebb and flow” of future decisions, he said.

“The Bank judges that the current degree of monetary policy stimulus remains appropriate,” the central bank’s statement said.

Canada joins Singapore, India and Australia among countries that are pausing after unexpected cuts earlier in the year. Poloz billed his January cut as “insurance” for the Group of Seven’s biggest crude exporter and since then reports on output, employment and housing have all beaten economist forecasts.
‘Atrocious’ Economy

Poloz’s assessment of weakness in the economy, including a comment last month to the Financial Times that the first quarter would be “atrocious,” provided fodder to opposition lawmakers to criticize Prime Minister Stephen Harper over his handling of the economy ahead of elections in October. Harper has ruled out using government finances to spur economic growth. His Finance Minister Joe Oliver is scheduled to present the 2015-16 budget later this month.

The drop in prices for crude oil, Canada’s biggest export, reduced real gross domestic income by 0.7 percent in the fourth quarter and the relative prices of exports to imports by 8 percent, the bank said today. Oil and gas investment will drop 30 percent this year, while non-energy investment will grow 7 percent over the next few years on average, the report said.
Downside Risks

To be sure, the bank said today that significant slack remains in the economy and oil prices could lead to problems beyond the first quarter. “Over the remainder of 2015, there continue to be important downside risks to oil prices, since it will take time for cuts in investment to be reflected in reduced production,” the bank said.

The central bank’s updated assumption on Brent crude was down $5 to $55 a barrel. The drop in crude prices has triggered layoffs and canceled investments from companies such as Talisman Energy Inc. and Cnooc Ltd.’s Nexen Energy.

Housing markets in Alberta, home to the largest heavy oil deposits, are vulnerable to a correction, as are those in Toronto and Vancouver after “robust price growth,” the bank said.

Vancouver’s real estate board announced this month the average price for detached homes in the city surpassed C$1.4 million ($1.1 million) for the first time last month as purchases surged 54 percent from a year earlier. Average sales prices in Toronto are up 10 percent from a year earlier.