UPDATE 3-Bank of Canada says January rate cut the right amount of "insurance"

Tue Feb 24, 2015 5:22pm EST
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(New with remarks by Poloz analyzing January rate cut)

By Leah Schnurr and Jeffrey Hodgson

LONDON, Ontario Feb 24 (Reuters) - The Bank of Canada took out the right amount of "insurance" when it cut interest rates by one-quarter percentage point last month to protect the economy from the impact of cheaper oil, Governor Stephen Poloz said on Tuesday.

The rate move bought the central bank time to see how Canada's oil-exporting economy responds to a plunge in oil prices, Poloz said in the bank's last pronouncement before its next rate decision on March 4.

"At the time we made the cut, we thought it was approximately the right amount of insurance given what we saw," he told reporters, pointing out that the bank assumed a $60 a barrel price for Brent crude. Brent traded on Tuesday at $58.65.

"That assumption's held up well so far, and so what that shows is that under those assumptions we get back to full capacity late 2016, and then inflation would be sustainably on target."

After the shock rate cut in January, markets began to assume there would be another one next week. But Deputy Governor Agathe Cote was careful last week to say there was "no predetermined path" for the policy rate.

By late Tuesday, the market's rate cut expectations had fallen to 70 percent from 74 percent before Poloz's remarks . The Canadian dollar strengthened to a session high of C$1.2486, or 80.09 U.S. cents, from C$1.2608, or 79.31 U.S. cents.   Continued...