Bank of Canada sees broadening recovery, oil price risk

Wed Dec 3, 2014 7:22pm EST
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By Randall Palmer and Leah Schnurr

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.   Continued...

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. REUTERS/Chris Wattie