Bank of Canada's Poloz: economy on track for partial second quarter rebound - By Randall Palmer

Bank of Canada's Poloz: economy on track for partial second quarter rebound

Tue May 19, 2015 1:04pm EDT

 

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By Randall Palmer

CHARLOTTETOWN, Prince Edward Island(Reuters) - The Canadian economy remains on track for a partial rebound in the second quarter as non-energy exports and other positive forces continue to build, Bank of Canada Governor Stephen Poloz said on Tuesday.

Against the backdrop of the central bank's shock interest rate cut in January and a weaker Canadian dollar, Poloz said the economy would be marked by strong positive momentum in the second half of the year and be on track to reach full capacity by the end of 2016.

Recent gloomy data out of the United States have raised concerns that growth south of the border will not be strong enough to meaningfully bolster Canada's economy.

Poloz reiterated that the shock to the economy from cheaper crude oil, a major Canadian export, appears to be faster than initially anticipated, but not larger. Still, he noted there is a risk the lower oil prices could have a greater impact.

He also noted the uncertainty hovering over Canada's economy, with both oil prices and the Canadian dollar, also known as the loonie, having moved higher in recent weeks.

"We don't have a bridge, so the economy can't avoid the choppy waters," Poloz said in the prepared text of a speech in Charlottetown, Prince Edward Island. "However, there are signs that tell us we're headed in the right direction."

Ahead of Poloz's speech, markets were pricing in that the central bank would keep rates on hold at 0.75 percent at its next meeting later this month.

Poloz said the drop in oil and depreciation in the Canadian dollar have "complicated" the central bank's gauge of the underlying inflation trend. The bank's current best judgment is that underlying inflation is around 1.6 percent to 1.8 percent, he said.

As growth accelerates over the rest of the year, the underlying inflation trend should converge with total inflation at the bank's 2 percent target when the economy returns to full capacity, he said.

Ahead of the renewal of its inflation target next year, the Bank of Canada will consider whether to continue to highlight one measure of the underlying trend and if the current core inflation measure should be kept as the main guide, Poloz said.

(Reporting by Randall Palmer; Writing by Leah Schnurr and David Ljunggren; Editing by Paul Simao)

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