OTTAWA (Reuters) - Bank of Canada Governor Stephen Poloz held interest rates steady on Wednesday and suggested that no further cuts are imminent due to the bank’s expectation that the economy will rebound later this year from the first quarter’s zero growth.
Poloz stunned markets in January with a surprise 25-basis-point cut to provide what he called “insurance” against a downturn in Canada’s oil-heavy economy stemming from the oil-price crash. He indicated on Wednesday that could be enough.
“Given what we know today, we have a balanced risk forecast, and therefore the inflation outlook has got risks on both sides, but we believe that they are balanced and so we have the right amount of insurance,” he told a news conference.
The bank slashed its estimate for first quarter growth to zero from the annualized 1.5 percent it forecast in January, but it said the second quarter and especially the third should be much stronger.
Poloz repeated his view that the oil shock’s impact is likely to have been most severe in the first part of the year.
He said the key risk to that view is that the shock is more acute than he expects and the economy does not return to full capacity until 2017, which “would be a case for considering changing monetary policy”.
The more bullish than expected central bank stance helped boost the Canadian dollar to its strongest level since mid-February. Traders also reduced their bets on a rate cut.
Canada is a major oil exporter and the oil-price plunge that started last year has hit oil-field drilling and employment hard.
Poloz forecast, however, that an uptick in non-energy exports, investment and jobs will start emerging around midyear.
“There’s the impression certainly that the bank was going to sound a little bit more cautious, but that’s definitely not the case,” TD Securities chief Canada macro strategist David Tulk said.
The bank said Canada’s output gap - the difference between current production and full capacity - widened in the weak first quarter, putting additional downward pressure on inflation. It said recovery would mean “that the output gap will be back in line with its previous trajectory later this year.”
Markets expect data over the coming months will tell the tale of whether the positive developments cited by the bank - bolstered by the lower Canadian dollar, cheaper borrowing costs, and gathering U.S. strength - overcome the negative.
Additional reporting by Andrea Hopkins, Alastair Sharp and Solarina Ho in Toronto; Editing by Peter Galloway and Jeffrey Hodgson