Bank of Canada Governor Stephen Poloz said a rate cut is no longer on the table amid signs of an improving economy, even as he continued to cast doubt on the sustainability of the rebound.
Canada’s central bank — which has been very cautious in recent months on its assessment of the nation’s outlook — predicted Wednesday the economy will return more quickly to full capacity, a key variable for policy makers since it’s the main driver of inflation. At a press conference after holding rates steady, Poloz said the central bank has become “decidedly neutral” and didn’t consider the possibility of a rate cut, as it had earlier this year.
“In this context, given the data that we’ve seen in the last few months, I can say quite clearly, ‘No, a rate cut was not on the table at this time,'” Poloz told reporters in Ottawa. “As we’ve outlined pretty bluntly, given the circumstances we see, we’re decidedly neutral.
Watch the Bank of Canada press conference:[youtube=http://www.youtube.com/watch?v=BMCSvsGBxMU&w=560&h=315]
For weeks, Poloz has downplayed the recent run of strong data, pointing instead to persistent slack in the economy, especially relative to the U.S., as well as emerging geopolitical risks — a dovishness that has helped to keep the Canadian dollar in check and exporters more competitive. He even in talked openly in January about the possibility of cutting interest rates if needed.
While highlighting many of the same risks in their announcement, policy makers were forced to “acknowledge” the improvement in a statement that pointed out domestic growth has been faster than expected, with less economic slack than previously thought and a strengthening global outlook. The benchmark interest rate remains unchanged at 0.5 per cent.
Still, the central bank, which also published its quarterly forecasts Wednesday, cited many reasons for caution and continued to highlight the divergence between a U.S. economy, which the bank said is in full employment, and Canada “where material slack remains.” There are signs of weakness in the labor market, inflation data, exports and business investment, the central bank said. The Bank of Canada also revised down its estimates for how quickly the nation’s economy can grow.
Senior Deputy Governor Carolyn Wilkins, in an opening statement to reporters, said the central bank’s governing council was “very focused” on how much excess capacity remains in the economy, and has concluded there is still “material room” to grow.
- The Bank of Canada projected a quicker return to full capacity than in its last quarterly report in January. It forecast the nation’s output gap will close in the first half of 2018, earlier than a January call for the return to full capacity in mid-2018. That implies at least a one-quarter faster return.
- That reflects two things: a “higher profile for economic activity” and a reduction in the bank’s estimate for potential growth, which was cut to 1.3 per cent in 2017 from a previous estimate of 1.5 per cent.
- Faster-than-expected GDP growth in 2017 — the bank increased its growth estimate for the year to 2.6 per cent from 2.1 per cent — is largely due to residential investment being brought forward from future years and will largely dissipate by 2018, the central bank estimates. As a result, the central bank lowered its estimate for 2018 growth to 1.9 per cent.
- The amount of excess capacity in the first quarter of this year is estimated at three-quarters of a percentage point of GDP, versus 1.25 per cent in the fourth quarter of 2016.