Bank of Canada speech leaves markets doubting near-term rate cut

Thu Jan 7, 2016 12:15pm EST
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By Randall Palmer and David Ljunggren

OTTAWA (Reuters) - Bank of Canada Governor Stephen Poloz extolled the benefits of the Canadian dollar's weakness on Thursday, in a speech that left investors doubtful he would cut Canada's benchmark interest rate later this month.

Poloz insisted to reporters afterwards that he was not a cheerleader for a weaker dollar, but in his speech he did dwell at length on how the depreciation of the currency was "a natural part" of adjusting to cheap oil and commodities prices.

The currency, which hit a 12-year low in early trade, firmed following the speech as investors reduced their bets of a rate cut during 2016.

"People were looking at the speech as potentially laying the groundwork for a rate cut and he didn't send a clear signal," said Andrew Kelvin, senior rates strategist at TD Securities. "There's no smoking gun."

Markets are on edge because a year ago Poloz cut interest rates to counter a plunge in oil prices, giving no signal ahead of time. Another cut followed in July. The latest slump in oil prices fueled speculation he will ease again.

Poloz said oil and commodity markets had not seen another big price shock on the scale that afflicted them a year ago.

Nonetheless, economists said an eventual rate cut remained possible.

"It doesn’t look as though the BoC is ready to ease further at present, though that certainly doesn't rule out a move later this year if oil continues to dive and the data remain weak," said Benjamin Reitzes, senior economist with Bank of Montreal.   Continued...

Bank of Canada Governor Stephen Poloz takes part in a question and answer session after delivering a speech in Ottawa, Canada, January 7, 2016. REUTERS/Chris Wattie