Tuesday, 19 May, 2015 15:56
Written by McBrotberg
BARRIE McKENNA
11:33 EST Tuesday, May 19, 2015
Stephen Poloz says the Bank of Canada is struggling to get a good reading on inflation because of a raft of temporary factors, including the oil price plunge and the cheaper Canadian dollar.
But the central bank governor said he’s not about to react to every blip in inflation. The bank’s key overnight interest rate is now at 0.75 per cent.
“It wouldn’t make sense to respond to every wiggle in the inflation rate,” he said in remarks prepared for a speech Tuesday to the Greater Charlottetown Area Chamber of Commerce.
The bank’s “current best judgment” is that underlying “trend” inflation is running at 1.6 to 1.8 per cent – still below the bank’s official 2-per-cent target.
The bank’s job is made more difficult because the lower dollar is temporarily boosting inflation, while lower oil prices are driving inflation lower.
And yet the price of crude has regained some of its lost ground in recent weeks, rising above roughly $60 (U.S.) per barrel – whichhas helped lift the Canadian dollar.
“All of this has certainly made it more challenging to distinguish the trend from the temporary,” Mr. Poloz said.
He noted there are “a lot of moving parts” clouding the inflation outlook.
In a mostly upbeat speech, Mr. Poloz said the Canadian economy remains on track to reach full capacity and sustainable growth by late 2016. “We project it will take 18 months or so to get there,” he said.
Ignoring recent signs of economic weakness – both in Canada and the U.S. – Mr. Poloz instead highlighted a number of positive trends, including a rebound in key exports outside the oil patch, a decline in long-term unemployment, more prime-age Canadians joining the labour force and early signs of a recovery in the creation of new companies.
A basket of key non-energy exports tracked by the bank is up 15 per cent in the 12 months through March, he pointed out. That includes jumps of 20 per cent in aerospace, 11 per cent for machinery and equipment and 4.5 per cent in foreign tourism demand.
Mr. Poloz said he’s also upbeat about business investment outside the energy sector. He pointed out that companies selling into the U.S. are starting to “feel capacity constraints” and may need to “step up investment.”
Many economists are much less optimistic, pointing to a slowdown in U.S. growth early this year and still-weak business investment across most industries in Canada.
Mr. Poloz also highlighted how lower interest rates and cheaper gasoline are helping Canadians. He said a household renewing a $100,000 mortgage is saving $250 a year on interest payments. Likewise, lower gasoline prices are saving households $500 a year, he said.
The Bank of Canada has kept its key interest rate unchanged at 0.75 per cent since January, when it surprised investors with a quarter-percentage-point rate cut.
