* BoC says risk of low inflation has become more severe
* Says direction of next rate move depends on data
* Door "slightly more open to a rate cut", Poloz tells BNN
* BoC says C$ strong but that depreciation will help exports
By Randall Palmer and Louise Egan
OTTAWA, Jan 22 The Bank of Canada said on
Wednesday it has become more concerned about weak inflation, and
that a "strong" currency is still hampering the country's
exports, dovish language that helped send the Canadian dollar to
a four-year low.
The central bank also kept its key interest rate on hold at
1.0 percent, as expected, but explicitly stated that its next
rate move could be either down or up, depending on economic
"We are more concerned about low inflation today than we
were three months ago," Governor Stephen Poloz told a news
conference. "There's a lot of risk in that analysis. That
balance of risk has tilted just a little to the downside, within
a zone we would call the neutral zone."
Analysts said the bank was about as dovish as it could be
without explicitly saying it was likely to cut rates. They said
remarks in its Monetary Policy Report on how the Canadian dollar
was still strong, and that its strength still posed an obstacle
to exports, was a green light for dollar bears.
Asked later by BNN television whether the door had opened a
bit wider to a rate cut, Poloz replied: "The door is slightly
more open. However, we still are even-handed about it."
Doug Porter, chief economist at BMO Capital Markets, said
the central bank had found a way of signaling to the markets
that it would not mind an even weaker currency.
The Canadian dollar fell toward the psychological
barrier of 90 U.S. cents, hitting a session low on Wednesday at
C$1.1092, or 90.16 U.S. cents - its weakest level since
September 2009. It closed at $1.1088, or 90.19 U.S. cents.
Poloz said after the bank's last Monetary Policy Report in
October that the bank's neutral stance meant rates could fall as
easily as rise, but such language had not been included in the
bank's official rate statement until Wednesday.
"The timing and direction of the next change to the policy
rate will depend on how the new information influences the
balance of risks," it said.
The Canadian dollar has fallen by more than 7 percent
against the greenback since the October policy shift.
"Definitely there is scope, I think, if the data does
disappoint, for them to introduce an easing bias in the future,"
said David Tulk, chief macro strategist for Canada at TD
Securities, emphasizing that an actual rate cut would only come
if inflation data and other economic readings deteriorate.
The bank noted the stimulative impact on exports and
economic growth of the Canadian dollar's recent depreciation,
especially at a time when the U.S. recovery is becoming more
firmly entrenched. The currency's drop will also help drive
Canadian inflation upward, it said.
Poloz said currency movements were having less of an effect
than they did a decade ago because of increased corporate
globalization. So while a weaker Canadian dollar means firms get
more for their exports, the companies also have to pay more for
inputs because more of the inputs are being imported.
More important than the currency's level is the improved
outlook for the U.S. economy, with a weaker currency just "icing
on the cake" of stronger U.S. growth, he said.
Led by Poloz since June, the central bank dropped a
longstanding bias towards hiking interest rates last October. It
has not changed its key rate since September 2010.
"We know that some day interest rates aren't going to be
this low. We're obviously indicating it's a long time from now,"
he told BNN.
In a Reuters poll last week, analysts predicted the bank's
next rate move would be a hike, but not until the second quarter
Overnight index swaps, which trade based on expectations for
the central bank's policy rate, priced in an increased chance of
a rate cut by September .
GLOBAL DISINFLATION WORRIES
The bank's increased concern about possible disinflation is
shared by policymakers around the world and it comes at a time
when global markets are sensitive to interest rate risk.
The U.S. Federal Reserve has begun scaling back its massive
stimulus program and there is talk about the Bank of England
possibly raising rates. On the other hand, the European Central
Bank and Bank of Japan are firmly in stimulus mode.
The bank sees inflation lower than it had forecast in its
last report in October, with total and core measures around 1
percent in the first half of 2014, at the bottom end of its
target range of 1 percent to 3 percent. But it still sees
inflation returning to the 2 percent target in "about two
Growth sped up in the latter half of 2013, it said, adding
there were few signs exports and business investment were
replacing indebted consumers as the drivers of growth.
The bank also revised its forecast for 2014 growth upward to
2.5 percent from 2.3 percent, following anticipated growth of
1.8 percent in 2013.