Bank of Canada Chief Defends Interest Rate Cut: Expects Positive Changes despite Falling Oil Price

Bank of Canada Governor Stephen Poloz has defended the surprise cut of the key lending rate in January, even as Canadian dollar continues its weakening trend. He said the step was an “insurance” against the economic shock coming from plunging oil prices.

Poloz surprised the financial markets in January by cutting the central bank’s key lending rate to 0.75 percent from one percent. Despite his statement that he would not "talk the dollar down," the Canadian dollar fell about three cents in the aftermath of these comments.

Speaking at Western University in London, Poloz justified the rate cut as a way to buy time for the bank to analyse how energy prices would affect Canada’s economy. “Over the last two years, the world economy and our export sector have vastly underperformed our expectations,” said Poloz. He tried to assure that the rate cut was not aimed at driving down the value of the currency and stressed the need for a stimulus to compensate for the loss of revenue from oil prices. According to Poloz, the main factor behind the drop of dollar was oil prices, not the policy of Bank of Canada.

Poloz hoped that more positive effects will come over, including higher exports due to a stronger U.S. economy, lower dollar and increased consumption, in the coming weeks. “We are still a long way from home and the headwinds are strong,” he added.

U.S. Rates May Raise

Canada’s interest cut will have a contrast in the U.S. as speculation is rife that the chair of U.S. Federal Reserve, Janet Yellen, may raise prime lending rates for the first time since 2007, as the American economy is showing strong signs of recovery. A combination of U.S. interest rate hike and rate cut in Canada may tumble the Canadian dollar further. However, it is helping manufacturers in Southwestern Ontario, where the exports have become more competitive with the rate cut and fall of dollar.

Economist Douglas Porter said in London that Poloz may stick to a lower value for the dollar, given his roots in the auto industry of Oshawa. He remarked that Poloz is sensitive to the plight of exporters and manufacturers than his predecessor Mark Carney.

Bank Of Montreal Results

Meanwhile, Wall Street Journal reports that Bank of Montreal, Canada’s fourth-largest lender, suffered a dip in profits in the first fiscal-quarter and missed its expectations. It was sideswiped by plunging oil prices, sliding interest rates and a falling Canadian dollar.

Toronto-based BMO, reported its results for the November-to-January quarter and stated that a confluence of challenges created an “unsettled environment” hurting its results. Those issues can further create headwinds for other Canadian banks earnings and become a major test of the industry’s profitability since the financial crisis.

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