Bank of Canada’s Poloz says January rate cut buys time to see how economy responds to oil plunge

OTTAWA — Bank of Canada governor Stephen Poloz said Tuesday the shock from the plunge in oil prices remains “uncertain,” but the last month’s rate cut will “buy us some time” to assess its economic impact.

“The oil-price shock is an important setback in our progress toward full capacity, full employment and stable inflation because it is a net negative for economic growth,” Mr. Poloz said in a speech in London, Ont.

“And because lower oil prices mean lower Canadian income, the shock will worsen the debt-to-income ratio of Canadian households, thereby increasing financial stability risks.”

Mr. Poloz, 58, said the central bank’s Jan. 27 decision to cut its key lending rate to 0.75% from 1% — where it had been since September 2010 — “was intended to take out some insurance against both sets of risks.”

What we are trying to do is to manage the risks we face, not eliminate them

It will also “cushion the decline in income and employment, as well as the rise in the debt-to-income ration, that lower oil prices will bring,” he added.

While the collapse in oil “itself is of uncertain size oil,” the rate cut “buys us some time to see how the economy actually responds,” the governor told an audience at Western University, where his was a student in the late 1970s.

Crude was trading just above US$49 a barrel on Tuesday. Hardest hit by oil crunch have been the resources-rich provinces like Alberta. Lower prices have resulted in cuts in expansion and hiring in the oil patch, and are beginning to bite into provincial and federal revenues.

“As oil prices are roughly half price, that constitutes approximately a 3% pay cut for Canada,” Mr. Poloz told a news conference after his speech.

The full impact of what the oil shock is doing to the Canadian economy may not be “fully appreciated. And it may not be in every sector. “

The Bank of Canada’s next rate decision will come March 4, along with its quarterly Monetary Policy Report, which will update how policymakers view the impact of the oil prices on the economy and the inflation outlook.

Prior to Mr. Poloz’s speech on Tuesday, the markets have been anticipating another 0.25 % cut in the bank’s trendsetting rate next week.

“While our official call is for a March move, we are sympathetic to the notion that it could be delayed until the April 15 meeting, which will include a MPR,” said economist Mark Chandler at RBC Dominion Securities.

“The data dependency of the bank’s decision and – importantly, the oil price sensitivity of the decision – has not changed at all.”

Charles St-Arnaud, an economist at Nomura Securities Co., said that since the surprise January rate cut “comments from the governor and deputy governor have suggested that the drop in oil prices will have a material negative impact on the Canadian economy, leading to a larger excess supply and a delay in the timing for inflation to return to the target.”

“On its own, this would likely justify further action. However, recent remarks . . . clearly indicate that further rate cuts are not necessarily imminent.

 

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