March 26, 2015 / 1:12 PM / in 3 years

Bank of Canada says rate cut bought time, suggests April move unlikely

LONDON (Reuters) - The Bank of Canada’s January interest rate cut has bought it time to examine the effects of cheap oil on the economy, Governor Stephen Poloz said on Thursday in remarks that could signal the bank will hold rates steady next month.

Bank of Canada Governor Stephen Poloz takes part in a news conference upon the release of the Monetary Policy Report in Ottawa January 21, 2015. REUTERS/Chris Wattie

Poloz allowed the possibility that first-quarter economic growth might come in lower than the bank’s 1.5 percent forecast, and he did not rule out a negative reading, but he also noted growth was expected to bounce back later this year.

The bank expects the negative effects of cheaper oil on Canada, a major producer, to be early and substantial, and the positive effects to take longer to emerge, he said.

“We need to watch these competing forces play out in the economy, and the January rate cut has bought us some time to monitor that situation as it evolves,” he said in a speech.

Poloz later said that when he spoke of needing time to assess oil’s impact, “we measure this time not in days or weeks, it takes a little more time than that. We’re just now getting some data from January and February. It’s going to be more time before we know how the economy is actually responding.”

Poloz has endured a barrage of criticism this year for surprising markets with a quarter-point rate cut in January, then leaving many with the impression that a second cut was imminent.

Explaining his decision to keep the overnight rate unchanged at 0.75 percent on March 4, Poloz said that after the January cut, inflation fell and output expanded as expected, while financial conditions eased and oil prices stabilized.

“This made us feel increasingly comfortable with the amount of insurance we had already taken out, which led to the decision to keep rates unchanged.”

The bank’s next policy statement is on April 15, and markets have priced in only a 17 percent chance of a rate cut then.

Poloz said a soft start to the year could be the result of a one-off weather effect, as well as the oil shock hitting earlier than anticipated, suggesting this might not necessarily merit more “insurance” in the form of stimulus.

“If (the impact is) earlier, that just means that it’s over sooner and so it would not necessarily change our thinking about that insurance question. What we need though is a longer string of evidence to sort that out.”

Writing by Randall Palmer and Leah Schnurr in Ottawa; Editing by Peter Galloway and Jeffrey Hodgson

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