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By Randall Palmer and David Ljunggren
OTTAWA, Oct 29 (Reuters) - The head of Canada’s central bank on Wednesday welcomed the U.S. Federal Reserve’s decision to abandon its ultra-easy money policy, saying it showed the U.S. economy is gaining traction, but warned weaker oil prices will crimp Canadian growth.
The Federal Reserve on Wednesday ended its monthly bond purchase program and dropped a characterization of U.S. labor market slack as “significant” in a show of confidence in the economy’s prospects.
“This is unambiguously a good thing,” Bank of Canada Governor Stephen Poloz told a parliamentary committee in Ottawa.
“Quantitative easing was always in theory in the central banker’s tool kit, but was never brought out until we were truly in an emergency situation. And so, the fact (is) that the U.S. economy is gaining traction.”
The United States is Canada’s largest trading partner.
Poloz added that while the brightening outlook for the U.S. economy could weaken the Canadian dollar, it could also help Canadian business by spurring more exports.
“The most important ingredient for export sales is the U.S. economy recovering - is there a demand for our goods and services from the U.S. - and we see that traction as coming. If the Canadian dollar is a little lower than it was last year that adds to the profit margin,” he said.
Poloz warned, however, that a slump in global oil prices was likely to slow growth next year and posed a threat to jobs creation. He said the bank was working on the assumption of $85 per barrel crude oil in 2015.
“We would estimate at this stage that that effect net on Canada would be to take perhaps a quarter point off Canada’s GDP growth for 2015, which is sufficient for me to think about it and be concerned about it,” he said.
“When we’re predicting growth somewhere in the 2 to 2-1/2 percent range, and we need more than 2 percent growth to help close our output gap and create those jobs I talked about in my opening remarks, then a quarter point matters quite a lot in that context.”
Poloz said during his opening statement that the Bank of Canada will only use forward guidance during periods of stress and when traditional monetary policy tools are constrained.
“Otherwise, we will let markets do their job, which is to deal with the daily flow of new information and grind out new pricing, without specific interest rate guidance from the bank, but supported by the increased transparency around our outlook for inflation and the risks we are managing,” he said.
Poloz said the risks around achieving the bank’s inflation target over a reasonable time frame are roughly balanced. (Reporting by Randall Palmer and David Ljunggren; Writing by Richard Valdmanis; Editing by Chris Reese and Diane Craft)