BOC's Poloz Confident 2015 Rate Cuts Have 'Done Their Work' -- Update

By Paul Vieira Features Dow Jones Newswires

Bank of Canada Gov. Stephen Poloz on Tuesday said the interest-rate cuts it delivered in 2015 to fend off the fallout from plunging oil prices "have done their work," reinforcing a "hawkish" message the central bank delivered a day earlier that pushed the Canadian dollar upward.

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Mr. Poloz said the Canadian economy is gathering momentum, with an array of sectors expanding. Business investment also is firming following a prolonged weak spell fueled by the commodity-price slump, with capital spending expected to build as companies operate at near full capacity.

"It's a much more diverse recovery," Mr. Poloz said in an interview with Canadian Broadcasting Corp. in Winnipeg, Manitoba, where the central bank is holding a board of directors meeting. "What that suggests to us is that the interest-rate cuts that we put in place in 2015 have largely done their work, so that's very reassuring and we are encouraged by data."

The Canadian dollar strengthened further against the U.S. dollar following Mr. Poloz's comments shortly after 8:30 a.m. EDT. The U.S. dollar recently trading around C$1.3243, versus C$1.3283 before the interview started.

On Monday, the central bank's second-highest-ranking official, Carolyn Wilkins, rattled markets with an unexpected hawkish turn in a speech, in which she said the central bank would have to assess whether ultralow interest rates -- at 0.50% since July 2015 -- are still required given Canadian economic activity is broadening across industries and regions.

The comments this week from the two most senior Bank of Canada officials appear to have ignited volatility in the Canadian financial market. The loonie, or the nickname given to the Canadian currency, has gained about two cents against the U.S. dollar within the last day, while the yield on the two-year Canadian government bond moved to 0.906%, the highest mark since December 2014. Yields move inversely to the price of bonds.

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Further, the overnight-index swap market is now pricing in a 64% probability of a rate increase in October, up from 25% at the end of last week, according to TD Securities.

Financial-market volatility reflects the about-face this year in the Bank of Canada's outlook. In January, Mr. Poloz said further monetary-policy easing remained a possibility given the uncertainty posed by U.S. President Donald Trump on trade policy. Three-quarters of Canadian exports head to the U.S. market.

Mr. Poloz and other Bank of Canada officials continued to encourage caution even as a string of robust economic data emerged, signaling Canada's economy had moved into a higher gear after a slump fueled by lower commodity prices. It wasn't until its May 24 policy decision that the BOC embraced a slightly more upbeat tone on economic conditions.

Nick Exarhos, an economist at CIBC World Markets, said the central bank's message this week wasn't a surprise, given the strengthening employment data and first-quarter annualized growth of 3.7% that was tops among Group of Seven economies. It was the timing, ahead of a policy decision by the U.S. Federal Reserve due Wednesday, that caught market watchers off guard, he said. He said traders widely expected the Bank of Canada to stay the course in messaging this week and let a rise in the Fed's benchmark rate keep upward pressure on the Canadian currency in check, thereby helping exports.

Mr. Exarhos said uncertainty surrounding U.S. trade policy and less-than-stellar performance from exports likely rules out an imminent rate increase on July 12, when the Bank of Canada issues its next rate decision. But labor-market gains and commentary in recent weeks from Bank of Canada officials "are commensurate with the 50 basis points of tightening for the first half of 2018 -- or slightly earlier."

David George-Cosh in Toronto contributed to this article.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

June 13, 2017 11:53 ET (15:53 GMT)