Bank of Canada sees oil shaving a bigger slice from GDP

Fri Dec 5, 2014 12:45pm EST
 
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By Anthony Esposito

SANTIAGO (Reuters) - The slide in oil prices will probably cut Canadian economic growth by 1/3 of a percentage point in 2015, not the 1/4 point the Bank of Canada estimated in late October, bank Governor Stephen Poloz told Reuters on Friday.

He was speaking on the sidelines of an International Monetary Fund forum in Santiago two days after he held the central bank's policy rate steady at 1 percent. In the interest rate decision, he pointed to the stimulative impact of U.S. economic strength but also to the chilling effect on Canada, a major oil exporter, of cheaper crude.

"When we're predicting growth somewhere between 2 and 2.5 percent, 0.3 (the percentage point reduction from oil) or thereabouts is an important factor. That's downside risk," Poloz said in Santiago.

On Oct. 29, he had estimated the effect of the lower oil price on economic growth to be a quarter point, but prices have continued to slide since then.

He said that while lower oil is negative for the Canadian economy, it is a little positive for the United States, and that it has a spillover effect in the form of stronger U.S. demand for Canadian goods. But the U.S. economy is performing well independently of the oil price, he said, and the lower Canadian dollar is also helping to lift Canadian growth.

"The exchange rate is providing an offset, which is important; and the (Canadian) government has done some new tax changes and infrastructure announcements."

On the Bank of Canada's Dec. 3 statement that household imbalances present "a significant risk to financial stability," Poloz noted that the bank has been worried about imbalances - household debt is near record high levels - for at least a year.

He said household debt has increased in parallel with what he called "overheating in the housing market".   Continued...

 
Bank of Canada Governor Stephen Poloz prepares to testify before the Senate banking committee in Ottawa October 29, 2014. REUTERS/Chris Wattie