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Bank of Canada holds interest rate, views oil slump as temporary soft patch [UPDATED]

In addition to the oil slump, consumption and housing investment were underlined as weaker than expected


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OTTAWA—The Bank of Canada is holding interest rates steady as the economy navigates a temporary period of softness created by the sharp drop in oil prices, governor Stephen Poloz said Wednesday.

The recent plunge in crude prices has darkened the central bank’s short-term economic outlook—but Poloz predicted the country-wide effects of the oil slump to dissipate in the coming months and to allow Canada’s healthy economic expansion to resume with fresh momentum.

“As the snow melts, we’ll have a clearer view that the economy is back on track and then likely to grow above or around two per cent after that,” Poloz told reporters after announcing the bank would keep its benchmark interest rate at 1.75 per cent.

The bank reiterated Wednesday that more rate increases will still be necessary, but this time it inserted the phrase “over time” to its statement.

“It’s meant to inject a degree of ambiguity into the timing of this because obviously we’re dealing with developments over the last few months that constitute a delay,” Poloz said when pressed for an explanation.

“The phrase ‘over time’ is meant to convey that there’s no regularity, there’s no preset course—it’s all about data and it’s purposefully vague. So, that’s why I’m not going to explain how long it means.”

Thanks to the stronger economy, Poloz has raised the bank’s key interest rate target five times since mid-2017 to keep inflation from creeping up too high. The Bank of Canada has estimated it will no longer need to hike the rate once it reaches a “neutral” level of between 2.5 and 3.5 per cent—a destination range Poloz said is under review and could be updated in April.

The bank said the timing of its next hike will depend on several factors—with a particular focus on developments in the oil markets, the Canadian housing sector and global trade policy.

The recent drop in crude prices will have a “material impact” on the Canadian outlook, the bank said. The result will be slower-than-expected growth in an economy that the bank said has otherwise been performing well.

It’s now projecting growth to be just 1.7 per cent in 2019, down from its October forecast of 2.1 per cent—but it remains optimistic the economy will begin to strengthen again as early as the second quarter of this year.

Growth for the fourth quarter of 2018 is now expected to be 1.3 per cent, compared with the bank’s earlier prediction of 2.3 per cent, while growth over the first three months of 2019 is projected to be just 0.8 per cent.

The bank estimates the oil slump, which began last summer and has seen prices recover in recent weeks, will reduce the level of Canada’s gross domestic product by 0.5 per cent by the end of 2020. The economic impact of the decline is expected to be about one-quarter as large as the 2014-16 oil-price shock, the bank said.

The bank also pointed to several areas of uncertainty Wednesday—the persistence of the crude-price drop, the extent of its impact on non-oil-producing regions, how household spending adjusts to previous interest-rate hikes and tighter mortgage rules, and global trade developments.

Poloz was asked how Canada can shield itself from trade unknowns related to the U.S.-China dispute between the world’s two biggest economies—and Canada’s two largest business partners—or fears about the potential economic consequences of Brexit.

“Unfortunately, there doesn’t seem to be a place to hide from uncertainty like that,” he said, before discussing the U.S.-China conflict.

“If the world economy is going to slow down… then that’s going to affect every country.”

In addition to the oil slump, consumption and housing investment were underlined as weaker than expected in large part due to higher borrowing costs and stricter mortgage guidelines.

But the bank’s comments Wednesday also argued there are encouraging signs about the future.

It predicted exports and non-energy business investments to “grow solidly.” The business-investment lift, the bank said, will get a boost from Ottawa’s recently announced tax changes to allow companies to write off a bigger share of the cost of new equipment in the year they are purchased.

Even with the decrease in household spending, the bank said it’s expected to continue to be supported by other factors, including population growth fuelled by immigration, low unemployment rates, cheaper gasoline prices and wage gains.

“There is no question in our minds that the economy is (on) a solid footing,” Poloz said of the governing council.

The bank is expecting above-potential growth of 2.1 per cent in 2020.

Canada’s sharp deceleration in wage growth since last spring has also been highlighted by experts as a concern for the economy—particularly since the tightened labour market should translate into higher wages.

The bank’s latest monetary policy report, released Wednesday, sought to address the issue by saying national wage-growth figures have been weighed down by weaker numbers in the oil-producing provinces. In comparison, the rest of the country has shown a steady level of wage growth in recent years and the bank remains hopeful it will pick up its pace.

News from © Canadian Press Enterprises Inc. 2016

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