NEW YORK (Reuters) - The Bank of Canada’s January interest-rate cut appears to have helped the economy get back on track, bank Governor Stephen Poloz said on Monday, repeating his view that the cut provided enough “insurance” against the impact of dropping oil prices.
It is a message he has delivered several times over the past week, including last Wednesday, when the bank issued a statement keeping rates on hold, and the market has gradually reduced its bet on another rate cut this year to a 35 percent chance.
In the aftermath of the surprise 25-basis-point January rate cut, markets had fully priced in another cut but unwound those positions as prices for oil, a major Canadian export, stabilized and recovered partially, and as the central bank sent signals not to count on a further reduction.
“That amount (of rate cut) seems to be about right to restore our track for the Canadian economy for the next year or so and to get the output gap to close late 2016,” Poloz said, pointing to the reaction of exchange rates and the yield curve.
“So that keeps our inflation objective on track to be on sustainable 2 percent inflation around the end of 2016. That implies ... that the amount of insurance was just about the right amount.”
Poloz said the central bank, however, must allow for the possibility that oil could renew its fall.
“And you would reevaluate in the context of those oil prices, whether you needed to adjust your policy path,” he said, speaking at the Bloomberg Americas Monetary Summit.
The biggest “risk” to the bank’s outlook is actually the possibility the U.S. economy will grow faster than forecast, he said, noting that it would, of course, be a positive risk because higher U.S. demand would stimulate Canadian economic growth.
He said he would view a possible U.S. Federal Reserve rate hike positively since it would be in the context of assured U.S. economic momentum.
However, the Bank of Canada must still watch inflation, he said. “When lift-off does happen, we’ll have markets responding in a way that we’ll need to take into account and decide if our inflation objective has been put in danger in any way.”
Reporting by Jonathan Spicer and Daniel Bases in New York; additional reporting by Leah Schnurr in Ottawa; Writing by Randall Palmer in Ottawa; Editing by Chizu Nomiyama and Peter Galloway