Bank of Canada says January rate cut bought it time

LONDON: The Bank of Canada's January interest rate cut has bought it time to examine the effects of cheap oil on the economy, Governor Stephen Poloz said on Thursday in remarks that underscored the possibility the bank will keep rates steady next month.

Poloz repeated the bank's view that the negative effects of lower oil prices in Canada, a major oil producer, are beginning to appear and the positive effects will take longer to emerge.

"So we need to watch these competing forces play out in the economy, and the January rate cut has bought us some time to monitor the situation as it evolves," he said in the prepared text of a speech to the Canada-United Kingdom Chamber of Commerce.

"Some have characterized this as a move to 'data dependency'. I have to say I find this a bit strange. Data are always crucial in determining how the economy is progressing."

Explaining his decision to keep the overnight rate unchanged at 0.75 percent on March 4, Poloz said that after the January decision, inflation fell and output expanded as expected, while financial conditions eased and oil prices stabilized.

"This made us feel increasingly comfortable with the amount of insurance we had already taken out, which led to the decision to keep rates unchanged earlier this month," he said.

The bank's next policy statement is on April 15, and before Poloz's speech markets had priced in only an 18 percent chance of a rate cut on that date.

Poloz noted the recent rise in global market volatility, saying it reflected a world economy that was beginning the process of getting back to normal. This was particularly true for central banks as they have shifted from unconventional policies to a more even-handed approach, he said.

"Such financial volatility is neither inherently bad nor good," he said. "And if it reflects the emerging possibility that the one-sided outlook we have experienced for several years is finally becoming more balanced, then that is unambiguously good news."

Poloz said volatility was coming off historically low levels and that it was not abnormally high.