(Adds quotes on inflation and the currency from Bank of Canada
By Randall Palmer and David Ljunggren
OTTAWA, July 16 Shrugging off a recent surge in
inflation as temporary, the Bank of Canada warned on Wednesday
the country's economy does not yet have enough steam to grow
without the bank's help and said it could just as easily cut
interest rates as raise them.
The central bank, as expected, kept its key overnight rate
at a low 1 percent, the stimulative level at which it has been
for 46 months. But Governor Stephen Poloz made clear he is
worried about downside risks to the economy after "serial
disappointment" with global growth in recent years.
"Monetary conditions today are highly stimulative and it's
evident that we don't have a process of natural growth in the
economy yet," he told a news conference.
The central bank said it would keep its policy stance
"neutral", meaning its next move could be either a tightening or
Poloz acknowledged higher-than-expected inflation but said
underlying price pressures were low and emphasized how important
the level of the Canadian dollar is to a recovery in exports,
which in turn are critical to the overall economy.
"It is obviously a very important variable, because it feeds
directly into the export sector," he said. "The export sector is
a really important part of how we get home. Right now, we do not
have a sustainable growth picture in Canada."
Many analysts have said Poloz, who was previously head of
government agency Export Development Canada, wants a relatively
weak currency to stimulate exports. Poloz has repeatedly pointed
out the central bank has a mandate to target inflation and not
Still, the Canadian dollar touched a 3-1/2-week low after
the Bank of Canada published its policy statement.
"The statement reinforced the bank's dovishly neutral stance
by playing up the downside growth risks," said Sal Guatieri,
senior economist at BMO Capital Markets.
"The bottom line is, unless the Canadian dollar weakens and
the U.S. economy strengthens, Canada's economy probably won't
meet the Bank of Canada's forecast."
The central bank's quarterly Monetary Policy Report (MPR)
trimmed its Canadian economic growth forecast for 2014 to 2.2
percent from 2.3 percent and its 2015 forecast to 2.4 percent
from 2.5 percent.
The MPR had numerous references to the lower Canadian
dollar. It said, for example, that the level of the currency had
reversed a small portion of the past deterioration in Canada's
competitiveness. And it said that, combined with strengthening
foreign activity, the lower Canadian dollar should support
moderate export growth.
The central bank did omit language it had used in its June
rate statement that said the downside risks to its inflation
outlook remained important, an acknowledgement that overall
inflation hit 2.3 percent in May and that core inflation at 1.7
percent was also higher than forecast. The bank's target is 2
"The downside risks to inflation associated with a
below-target starting point have clearly diminished," Poloz
The overall tenor of the central bank's statement and
accompanying MPR, however, was to emphasize excess capacity in
the economy. It said the persistent slack in the economy,
combined with intense retail competition, would keep inflation
Recent higher inflation has resulted from higher energy
prices, the fall in the Canadian dollar and sector-specific
shocks such as costlier meat, "rather than due to any change in
domestic economic fundamentals," the bank said.
Demonstrating its disappointment with economic growth, the
central pushed back yet again, to mid-2016, its expectation for
the economy reaching full capacity and core inflation rising to
its 2 percent target.
It said that total inflation would dip back below 2 percent
in the second quarter of 2015 and rise to the target again only
in the first quarter of 2016.
(Additional reporting by Andrea Hopkins, Solarina Ho, Cameron
French, Alastair Sharp, Leah Schnurr and John Tilak in Toronto;
Editing by Peter Galloway and Jeffrey Hodgson)