OTTAWA – The Bank of Canada stuck with its trendsetting interest rate Wednesday even though it believes the oil-price shock stalled the economy to the point it had zero growth over the first three months of 2015.
The central bank’s justification for keeping its key rate at 0.75 per cent hinged, in large part, on its positive outlook for the non-energy sector, which it expects to materialize as the economic pain from the oil slump fades.
The bank predicted those improvements would show up in the form of more exports, investment and job opportunities.
“As the impact of the oil-price shock on growth starts to dissipate, this natural sequence is expected to re-emerge as the dominant trend around mid-year,” the bank said in its latest quarterly monetary policy report, also released Wednesday.
The bank also expects the economy to get a boost from the eased credit conditions it provided with its January interest-rate cut and from growing U.S. demand, which it predicts will bounce back after temporarily slowing in recent months.
Its outlook for inflation, the key indicator behind rate decisions, remained “roughly balanced.”
But bank governor Stephen Poloz warned the economy will first have to ride out the negative effects of the oil shock, which it says were more “front-loaded” than expected.
Six months ago, the bank predicted 2.4 per cent growth in real gross domestic product, Poloz told reporters Wednesday.
Then, in January, the bank dropped its first-quarter projection to 1.5 per cent.
“And today we estimate that we’re growing at zero per cent,” Poloz said in Ottawa.
“That’s a pretty big revision downwards, the direct fallout from the oil-price shock.”
Last month, Poloz told the Financial Times in an interview that the oil-price shock would make the economy’s first-quarter numbers look “atrocious.”
Asked about those remarks Wednesday, he avoided big adjectives this time, replying with: “The data from the first quarter, surely, will continue to look poor.”
In a March speech, Poloz also expressed concern about the second quarter: “We’ve got our fingers crossed.” Poloz carefully indicated Wednesday that the second- quarter turnaround was still not a “sure thing.”
Still, the bank is predicting a bigger second-quarter rebound, boosting its real GDP growth projection to 1.8 per cent from 1.5 per cent in January.
Looking at 2015 as a whole, the bank now is expecting real GDP growth to register just 1.9 per cent, a downgrade from its 2.1 per cent projection in January. It predicted 2.5 per cent GDP growth next year and 2.0 per cent in 2017.
The Bank of Canada said continued volatility around crude prices means the “ultimate size” of the impact from the oil slump will have to be watched closely, though the magnitude of the economic fallout will vary by region.
While crude-producing provinces such as Alberta, Saskatchewan and Newfoundland and Labrador will feel the brunt of the oil shock, a bank calculation also found other provinces will suffer due, in part, to their connection to the energy sector.
British Columbia and Manitoba will see modest declines in GDP, according to the bank. It also found that Ontario, Quebec and the Maritimes will see some losses in interprovincial exports to oil-producing regions, though they are expected to be offset by gains in other areas.
This marked the second straight policy meeting that Poloz stood pat on the interest rate since he blindsided markets in January by dropping the overnight benchmark a quarter of a percentage point to 0.75 per cent.
At the time, Poloz described the cut as insurance for the “unambiguously negative” impacts of sliding oil prices.
He later credited improving global economic conditions as a reason for holding the rate steady at the next policy meeting in March, a move that left many analysts with the impression he wouldn’t touch the rate any time soon.
The long period of extra-low rates has stirred concerns about household debt levels.
The report Wednesday said it expected income and wealth losses due to oil’s tailspin to curb spending and borrowing — providing an offset to cheaper available credit.
On Wednesday, the bank reiterated its prediction that non-energy exports — with help from the lower Canadian dollar — would re-emerge and help make up for losses in the energy sector. Early signs that such as transition is underway have started to show up in the data, the bank said.
The report noted that products categories expected to lead the sector’s comeback grew at their quickest clip since 2000 in the first months of 2015. It underlined sectors including aircraft and parts, industrial and electrical machinery, and pharmaceutical products.
Poloz said the data shows the pace of export-oriented GDP growth — more than four per cent — is increasing at twice the speed of the domestic-oriented GDP — which is about two per cent.
“So, we’re confident that this story is taking place,” said Poloz, who later noted that overall projections change as new datasets roll in.
“I’m very confident in our judgment as we’ve got it today, but these data never go in a straight line.”
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