OTTAWA - Bank of Canada governor Stephen Poloz says the economy
has been suffering from the effects of an "oil shock," so he
prescribed a remedy: an unexpected interest rate cut.
To deal with the impact of falling oil prices, Poloz lowered Canada's trend
setting rate Wednesday from one per cent to 0.75 per cent, a move that
blindsided the vast majority of experts.
Many economists were anticipating the central bank would hold off on moving
the rate until late 2015 or early 2016, with the next adjustment expected to be
But Poloz took another route Wednesday, as the central bank called the
effect of plummeting crude prices "unambiguously negative" for the
oil-exporting country's economy. "We have an oil-price shock, which will reduce the income flowing into
Canada and lead probably to some increase in unemployment overall," Poloz
told a news conference after Wednesday's rate announcement.
Until the effects of oil's late-2014 tailspin started to trickle through,
Canada appeared to be on the cusp of a promising post-recession rebound — and
inching closer to a rate increase. Still, Poloz said he remained encouraged by signs of economic life,
particularly in Canada's non-energy sector, thanks to a low loonie and robust
growth in the U.S.
That's where the central banker said his rate-cutting plan comes in.Poloz's solution aims to buffer the positives still present in the healing
Canadian economy from potential damage inflicted by low oil.
The goal is to give businesses, such as manufacturers still hobbled from the
2008-09 downturn, enough time to reinvest in their operations using cheaper
credit and, eventually, create jobs.
"We think that the positive
trend is underneath the surface, that things are getting stronger," Poloz
"I think that this is a
setback, it's an interruption if you like, in our path back to where we planned
to go. It's delaying things by perhaps as long as a year."
He described the bank's plan as
"insurance," a move intended to shorten that delayed recovery.
Poloz also sought to ease potential
public fears when asked whether the rate cut signals he's worried about the
health of the economy. He said he wouldn't put it quite that way.
"That doesn't mean that there's
a really bad thing, or a drastic thing, happening here," Poloz said of the
"For us, it's a more a matter
of repositioning the economy in such a way that it fires on all
The bank also offered assurances
that the rate drop would not increase Canada's high level of household debt.
But it did reiterate the warning
that Canadians remain vulnerable to economic shocks due to near record high
housing prices and debt.
The bank has blamed the accumulation
of debt on the extended period of the already low interest rate of one per
cent, which helped propel consumer spending.
However, Bank of Canada senior
deputy governor Carolyn Wilkins said Wednesday that current conditions are
unlikely to open the door for people to pile on more debt, even with the
slightly lower rate.
The bank predicted the oil collapse
would lead to a drop in employment and income, especially in energy-rich
regions. As a result, it expects less consumption due to a smaller amount of
Wilkins credited the oil price climb
for boosting the incomes of all Canadians by about seven per cent since 2002.
"What this oil shock does is it
reverses some of those gains," she said.
The bank's concerns over the oil
slump come as some Canadian industries reel from the sharp plunge in crude
prices, which are down more than 55 per cent since June.
The Canadian Association of
Petroleum Producers said Wednesday that it expected oilpatch investment to
total just $46 billion this year, down from $69 billion in 2014.
The decline in oil prices is also
expected to shave billions of dollars from the bottom lines of federal and
Last week, the federal government
took the rare step of delaying the budget until at least April, so it could
assess the effect of tumbling crude.
In latest monetary policy report,
also released Wednesday, the central bank predicted the country's headline
inflation rate to temporarily dip to one per cent — below the bank's target
range — before climbing back up to two per cent in the second half of the year.
The bank also highlighted persistent
problems in Canada's labour market, where it found long-term unemployment was
still close to its "post-crisis peak."
It said average hours worked
remained low and the proportion of people who could only find part-time work
was still high.
The bank predicted the pace of
Canada's economic growth — measured by the real gross domestic product — to
slow to roughly 1.5 per cent in the first half of 2015 and for the output gap
The Canadian economy is expected to
gather steam in the second half of the year, allowing real GDP growth to
average 2.1 per cent in 2015 and 2.4 per cent in 2016.
In its last monetary policy report —
in October — the Bank of Canada predicted 2.4 per cent growth for 2015.
The bank's estimates were based on
oil prices of US$60 per barrel, well above current levels which remain well
under US$50. The report said if oil were to remain close to US$50, real GDP
growth would dip to 1.25 per cent in the first half of 2015.
The Bank of Canada is scheduled to
make its next interest-rate announcement March 4, while its next monetary
policy report is due April 15.
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