Bank of Canada says inflation surge temporary, warns on growth

Wed Jul 16, 2014 3:05pm EDT
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By Randall Palmer and David Ljunggren

OTTAWA (Reuters) - Shrugging off a recent surge in inflation as temporary, the Bank of Canada warned on Wednesday the country's economy does not yet have enough steam to grow without the bank's help and said it could just as easily cut interest rates as raise them.

The central bank, as expected, kept its key overnight rate at a low 1 percent, the stimulative level at which it has been for 46 months. But Governor Stephen Poloz made clear he is worried about downside risks to the economy after "serial disappointment" with global growth in recent years.

"Monetary conditions today are highly stimulative and it's evident that we don't have a process of natural growth in the economy yet," he told a news conference.

The central bank said it would keep its policy stance "neutral", meaning its next move could be either a tightening or easing.

Poloz acknowledged higher-than-expected inflation but said underlying price pressures were low and emphasized how important the level of the Canadian dollar is to a recovery in exports, which in turn are critical to the overall economy.

"It is obviously a very important variable, because it feeds directly into the export sector," he said. "The export sector is a really important part of how we get home. Right now, we do not have a sustainable growth picture in Canada."

Many analysts have said Poloz, who was previously head of government agency Export Development Canada, wants a relatively weak currency to stimulate exports. Poloz has repeatedly pointed out the central bank has a mandate to target inflation and not the currency.

Still, the Canadian dollar touched a 3-1/2-week low after the Bank of Canada published its policy statement. [CAD/]   Continued...

A sign framed by maple leaves is pictured in front of the Bank of Canada building in Ottawa July 17, 2012. REUTERS/Chris Wattie