December 4, 2014 / 12:23 AM / 3 years ago

Bank of Canada sees broadening recovery, oil price risk

3 Min Read

Bank of Canada Governor Stephen Poloz takes part in a news conference upon the release of the Financial System Review in Ottawa June 12, 2014.Chris Wattie

OTTAWA (Reuters) - The Bank of Canada held its main policy rate at 1 percent on Wednesday, declaring that while Canada's economic recovery is broadening to include exports and business investment, lower oil prices could cut inflation more than expected.

The bank's statement was seen as slightly more optimistic than recent communiques, and it helped boost the Canadian dollar. Economists were cautious, however, about how much of a bearing it would have on the timing of any policy tightening by the bank.

"It's a pretty even-handed policy statement. For every good thing there's an offsetting bad thing," said BMO Capital Markets senior economist Sal Guatieri, who held to his forecast of a rate increase next October.

Bank of Canada Governor Stephen Poloz has long looked for the driver of the economy to rotate from the overstretched consumer to exports and then business investment.

Noting that stronger exports were beginning to be reflected in increased business investment and employment, the statement said this suggests "the hoped-for sequence of rebuilding that will lead to balanced and self-sustaining growth may finally have begun."

The bank dismissed higher-than-expected inflation as largely temporary given weaker oil prices.

Poloz noted at an on-stage interview at a conference sponsored by The Economist magazine in Toronto that the sharp drop in the price of oil during the past month is a "downside risk" to both growth and inflation.

"But there are some offsets which make it more of a risk as opposed to a mechanical thing. So yes, the U.S. economy is showing more encouraging signs, we see it in our exports," he said.

The Canadian dollar CAD=D4 strengthened after the statement. And overnight index swaps, which trade based on expectations for the main policy rate, showed traders slightly increasing their bets that there will be a rate hike in second-half 2015. BOCWATCH

Given recent encouraging developments, the bank said the output gap appeared to be smaller than projected in October, though the labor market continues to indicate significant slack, something Poloz reiterated in Toronto.

"We take comprehensive measure of how much capacity there is in the labor market indicators, output indicators. The fact is there is a lot of room for the economy to grow," he said.

Poloz said the economy could grow at an above-trend rate for about two years before it would use up this slack.

With additional reporting by Alastair Sharp and Jeffrey Hodgson in Toronto; Editing by Peter Galloway and Diane Craft

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