Poloz ready with unconventional tools if needed to fight shock

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Canada’s central bank is prepared to deploy “unconventional” tools if needed to curb lingering damage from a slide in oil and other commodity prices.

“We have a number of tools at our disposal--both conventional and unconventional--to mitigate risks to our inflation target or to our financial system, should they arise,” Governor Stephen Poloz said in the text of a speech he’s giving Thursday in Ottawa, which will be followed by a press conference. “The Bank of Canada will continue to run an independent monetary policy, anchored by our inflation target, and we will use our tools to manage risks along the way.”

The speech “Life After Liftoff: Divergence and U.S. Monetary Policy Normalization,” said the building recovery that led the Federal Reserve to raise interest rates is a “welcome development,” that could also create a new downside risk to Canada’s 2 percent inflation goal by driving up bond yields. The commodity shock is reversing a decade-long trend in Canada and policy-makers should facilitate the necessary adjustments, Poloz said, according to a press summary of his remarks distributed to journalists.

The Canadian dollar’s decline is no surprise given the drop in crude oil prices and is needed with the commodity crash reducing incomes by C$1,500 per person, Poloz said. The gains to non-energy exports from a weaker Canadian dollar are being blunted by the depreciation of other currencies, he said.

The comments are Poloz’s last before a Jan. 20 interest- rate decision, and comes with Canada’s dollar around 12-year lows on speculation he will cut for a third time in response to a crash in commodity prices. The 0.5 percent trend-setting rate is close to the all-time low of 0.25 percent set during the global financial crisis, and Poloz said last month there is room to move it to negative 0.5 percent if another big slump comes.

“This shock is leading to significant and complex economic adjustments in Canada,” Poloz said. “There is no simple policy response in this situation.”

Adjustments to such shocks can also be aided by fiscal policy and changes in labor-market rules, Poloz said. Those comments come as Prime Minister Justin Trudeau prepares a debut budget in the next few months where he’s promised deficit spending to boost growth.

Poloz said countries hurting from a commodity price drop have flexible currencies as “the most important facilitator of adjustment,” that isn’t “a panacea” for a recovery.
 
“This is helping to offset the weakness in the resource sector tied to lower commodity prices, but this natural process will take time to translate into more investment spending and new job creation,” Poloz said.

Bank of Canada policy makers will “look through” the short-term inflation pressure created by a weaker dollar as import prices rise, Poloz said. He also said the core index of prices is overstating the true trend of inflation as the currency depreciation raises import costs.

The speech didn’t make any direct comment on the outlook for the key interest rate, and Poloz said he will revise his economic forecast in the quarterly report that comes with his Jan. 20 rate decision.

Poloz made a surprise interest-rate cut in January of last year, when he was early to predict falling crude oil prices would damage the economy. This January, economists at Royal Bank of Canada and National Bank Financial have warned another rate cut this year is possible if the weakness continues.

Three-quarters of Canada’s exports are to the U.S., and so far manufacturers have struggled to rebuild orders to make up for falling oil and gas receipts. Energy shipments have fallen by 40.4 percent in November from 12 months earlier to C$5.92 billion, Statistics Canada said Wednesday. The trade deficit from January to November of C$22.8 billion exceeds the previous comparable record of C$12.9 billion set in 2012, even with a jump in automobile production.

Further interest-rate stimulus also poses risks. Poloz and Finance Minister Bill Morneau have warned about the dangers of heavy debt loads rung up by some younger families buying houses in the most expensive markets of Vancouver and Toronto, and cheaper mortgage rates could worsen that imbalance.


Greg Quinn
Bloomberg News

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