Things haven't been easy for Bank of Canada Governor Stephen Poloz over the last two years, with the currency in the tank and the economy struggling to cope with the decline in global raw materials prices. As I've said repeatedly on this blog, Poloz hasn't helped his own cause with some of his jaw-dropping musings, but the job was never going to be an easy one.
It's still not easy now, but it's maybe getting a little easier. Oil prices have stabilized and even bounced back a bit. There are signs that non-oil exports are beginning to improve in response to the long and steep decline in the exchange rate. The C$ itself has recovered smartly from its mid-January lows, but is still fully 30 percent down from its cyclical highs. Against this background, it was no surprise that the Bank opted to keep its key lending rate at 0.5 percent when it made its monthly policy announcement earlier today.
The Bank has cut its GDP growth forecast for the year to 1.4 percent, broadly in line with the Department of Finance's outlook and the private sector consensus. However, today's statement notes that the stimulative spending expected in the Federal budget later this month could push the growth rate slightly higher. It's also possible, although difficult to quantify, that the palpably better mood in the country under the new Government could also translate into higher growth, particularly on the consumer side.
The Bank will be keeping a wary eye on the exchange rate -- too much strength would be unwelcome -- while also hoping that the past weakness in the currency does not push inflation any higher. All in all, however, it seems likely that interest rates will remain at current levels through this year and very possibly well into 2017 -- and the Bank will not have to resort to the negative rates that Gov. Poloz seemed to be pondering just a couple of months ago.
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