UPDATE 3-Canada's rates to stay low, businesses should adjust -central bank

Tue Sep 20, 2016 3:58pm EDT
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(Adds comment from news conference, updates market reaction)

By Leah Schnurr

QUEBEC CITY, Quebec, Sept 20 (Reuters) - Canadian interest rates will stay low for longer as the economy faces strong headwinds and business investment is weaker than expected, but government spending on infrastructure will help growth, Bank of Canada Governor Stephen Poloz said on Tuesday.

In a speech suggesting the central bank will remain on the sidelines even as the economy struggles to gain traction, Poloz said corporations need to adjust their expectations for return on investment given the low interest rate environment.

"There is no smoking gun to suggest that the bank is ready to provide more stimulus here. They acknowledge that there are significant headwinds that require in exchange very stimulative monetary policy," David Tulk, chief Canada macro strategist at TD Securities, said just after the speech.

"But it's more just of the view that this is the environment we are sitting in as opposed to saying we need to do something about it."

Canada's economy has seen see-saw growth this year due to slumping oil prices and oil production disruptions due to wildfires in the energy heartland of Alberta. Non-energy exports have not taken up the slack despite a weaker currency that should make exports more competitive.

But the central bank, which cut rates twice last year, believes improving demand from the United States, Canada's biggest trading partner, will boost growth.

"In the second quarter, the U.S. economy did underperform, and it was a lot of investment that was lower and also housing. So these are two really important areas for Canada's exports. So that offers a certain amount of explanation and we think the U.S. economy is seeing a recovery," Poloz said at a news conference following a speech to Quebec economists.   Continued...