By Theophilos Argitis

The oil shock that hit Canada in 2014 is no longer acting as a drag on the economy, a top Bank of Canada official said Wednesday, repeating recent language from the central bank that has fuelled rate hike speculation.

In a speech on how policy makers gather intelligence to augment its analysis, Bank of Canada Deputy Governor Lynn Patterson outlined how the central bank’s “contacts” in the oil sector helped shape its decision to cut interest rates twice in 2015.

“That knowledge fed into our judgment and, ultimately, our decision to lower our policy rate in January and July 2015,” Patterson said in Calgary, according to prepared remarks. “Two years later, it is our view that these cuts have helped facilitate the economy’s adjustment to the oil price shock and that the economic drag from lower prices is largely behind us.”

The comments echo similar language by Governor Stephen Poloz, and are consistent with the central bank’s recent adoption of a tightening bias that has made the Canadian dollar the best performing Group of 10 currency this month.

Interest rates are “extraordinarily low,” Poloz said Tuesday in an interview with CNBC, adding the bank cut rates by 50 basis points in 2015 to counteract the effects of the oil price shock. “It does look as though those cuts have done their job,” he said, according to a transcript of the interview.

The speech Wednesday largely focused on the importance of gathering information from markets, which is Patterson’s responsibility at the bank. Here are some highlights:

Some Points

  • Market is evolving as a result of regulations, with more risk in unregulated areas that are not easily observed
  • Banks are allocating less of their balance sheet to certain asset classes such as corporate bonds
  • Patterson defended the practice of private meetings by Bank of Canada officials: “While we are committed to communicating new information on the outlook and policy only in public settings, the insights we garner in both public and private are invaluable for our policy making”
  • ETFs still small in Canada but they could “propagate liquidity shocks” if they grow and require monitoring though there are no concerns at present

Bloomberg.com