Bank of Canada sees broadening recovery, oil price risk

Wed Dec 3, 2014 12:42pm EST
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By Randall Palmer and Leah Schnurr

OTTAWA (Reuters) - The Bank of Canada held its 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. [CAD/]

"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.

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, warning weaker oil prices pose an important downside risk.

But it said this was tempered by a stronger U.S. economy, weaker Canadian dollar and recent federal fiscal measures.

"They're walking a very fine line," Toronto-Dominion Bank chief economist Craig Alexander said. "The bank clearly doesn't want to indicate an increasing desire to tighten policy."   Continued...

A sign framed by maple leaves is pictured in front of the Bank of Canada building in Ottawa July 17, 2012.       REUTERS/Chris Wattie