April 26, 2016 / 12:47 PM / a year ago

Bank of Canada: would need significant shock to resume easing bias

Bank of Canada Governor Stephen Poloz speaks during a news conference in Ottawa, Canada, April 13, 2016. REUTERS/Chris Wattie

NEW YORK (Reuters) - It would take another significant economic shock, such as a faltering U.S. economy, for the Bank of Canada to consider cutting interest rates again, the central bank’s head said on Tuesday.

After cutting interest rates twice last year to offset the economic shock of cheap oil, a major export for Canada, the bank has held steady so far this year and is expected to continue to do so when it meets next month. BOCWATCH

In January, the bank said that it had gone into its meeting with a bias toward cutting again but it held off due to the sudden drop in the Canadian dollar and as it waited to see what shape expected government stimulus would take.

The spending announced by the new Liberal government last month “more than offset” the negatives the economy is facing, Poloz said on Tuesday, leaving the central bank with a balanced outlook.

“What would it take to get us back into the bias toward easing? It would be another negative shock but it would need to be obviously a shock which is of some significance or an accumulation of other shocks,” Poloz said during a news conference.

“Something that meant there was a significant delay in that process of getting the economy back to full capacity and inflation on target.”

The bank currently forecasts the economy will get back to full capacity in the second half of next year.

Poloz cited as potential examples a shock in China that significantly downgrades global growth or a faltering of the U.S. economy. A strong recovery south of the border is key to the outlook for Canadian exports.

“None of these things are in our forecast, but those are just shocks that economists think about,” Poloz said.

In a speech in New York, Poloz credited low interest rates with keeping at bay the severe headwinds that are still impacting economies around the world, saying most agree that a sudden return of interest rates to 3 or 4 percent would trigger a recession.

His speech also focused on global trade, which he said is likely to grow more slowly than it did in the past, but that this should not be taken as a sign of an impending recession.

Writing by Leah Schnurr and David Ljunggren; Editing by Chizu Nomiyama

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