OTTAWA—Bank of Canada governor Stephen Poloz says he has not ruled out a future cut to interest rates despite his belief that the global and Canadian recoveries are picking up steam and that disinflationary pressures appear to be waning.
The head of Canada’s central bank made the comment after it decided to keep the trendsetting overnight rate at 1 percent for the 29th time in a row since September 2010.
The bank also pared back its estimate for first-quarter economic growth by a full point to 1.5 percent—mostly because of the severe winter weather that began in December—and 2014 growth to 2.3 percent from 2.5.
But in its overall assessment, the Bank of Canada’s new monetary policy report appeared to reflect a growing confidence in the global economic recovery and less concern about persistent low inflation and an overly hot housing sector.
Still, Poloz said in a teleconference from Toronto—where he was to attend former finance minister Jim Flaherty’s funeral in the afternoon—that considerable risks remain, including the possibility that Canadian exports won’t recover fully and the potential for a political shock from Ukraine’s difficulties with Russia.
“We are neutral, that means a rate cut cannot be taken off the table at this stage,” Poloz said. “It will depend on the data.”
Most economists are pencilling in a rate increase in the summer or fall of 2015, but say the chances of an actual cut from an already low setting are receding with each month of positive economic data, including more normal levels of inflation.
Poloz went to great lengths on Wednesday to say that inflation remains weak—despite expectations it will approach the desired 2 percent target within the next few months. He said the near-term return of inflation will be due to temporary factors such as higher energy prices, but underlying inflation likely won’t return to the target rate until 2016.
Still, the bank’s new outlook as outlined in the monetary policy report suggests Poloz and his deputy governors are becoming a little more convinced in the growth story.
The first-quarter slowdown is already looking like old news and the bank expects the second quarter to pick up to 2.5 percent growth, and the economy to average 2.5 percent annual growth in 2015 as a whole.
