Bank of Canada to Assess Whether 'Considerable' Stimulus Still Required -- Update

Canadian growth is broadening across industries and regions, and policy makers will assess whether ultralow interest rates are still required should the trend continue, the Bank of Canada's second-highest ranking official said Monday.

Two interest-rate cuts in 2015, taking the policy rate to a near-record low of 0.50%, has helped the economy adjust to the oil-price shock and the economic drag posed by the commodity-price swoon "is now largely behind us," said Carolyn Wilkins, the Bank of Canada's senior deputy governor in remarks to a business audience in Winnipeg, Manitoba.

She said the economy is exhibiting "encouraging signs," with most regions of the country witnessing a pickup in economic activity and over two-thirds of industries expanding.

"As growth continues and, ideally, broadens further, the [central bank's] governing council will be assessing whether all of the considerable monetary-policy stimulus presently in place is still required," she said.

Ms. Wilkins's remarks build on a pivot the Bank of Canada made last month, in which it embraced a more upbeat tone about the economic outlook while keeping its policy rate unchanged. The speech also comes days after a blockbuster May jobs report for Canada that indicated the country recorded its fastest pace of annual job growth in over four years.

Some economists say the speech represents the starkest message yet the central bank is firmly turning its focus to rate increases. The last time it raised its benchmark policy rate was in the fall of 2010.

A majority of Canadian market watchers anticipated rate increases to start in early 2018, based on improving economic data.

"I am not so sure that the Bank of Canada will wait until 2018," said Jimmy Jean, economist at Desjardins Capital Markets in Montreal, after reading the speech. In his view, the central bank "really likes what they are seeing in the economy, and they won't let themselves be paralyzed by downside risk."

The Canadian dollar gained nearly a penny against its U.S. counterpart as traders digested Ms. Wilkins' hawkish remarks. The Canadian dollar now trades around 74.90 U.S. cents from about 74.27 U.S. cents right before the release of the speech, according to CQG.

The central bank's next rate-policy decision is scheduled for July 12, at which time it will also release an updated economic forecast.

Royal Bank of Canada's economics team said Monday that markets are underestimating growing strength in the underlying Canadian economy. It said it anticipates the Bank of Canada to increase its policy rate multiple times before reaching 1.25% by the end of next year.

Until recent weeks, the Bank of Canada had urged caution amid a string of positive economic indicators. Canada has registered three straight quarters of strong growth, with first-quarter expansion of 3.7% annualized top among Group of Seven countries. Momentum in hiring has also continued unabated, with Canada adding 54,500 jobs in May, all of them full time and most concentrated in the private sector.

In her speech, Ms. Wilkins said the central bank is "acutely" aware of the risk posed to the Canadian economy by U.S. trade-policy uncertainty, with the Trump administration seeking changes to the North American Free-Trade Agreement in trilateral talks that begin in August. "This will likely remain an important uncertainty in our projection, but life goes on and decisions must be made in the meantime," she said.

Three-quarters of all Canadian exports are U.S. bound, and Ms. Wilkins said exports were a "disappointment" in an otherwise impressive first-quarter report on Canada's gross domestic product.

She added tepid inflationary pressure and wage growth point to the existence of slack, or unused industrial and labor capacity.

"That said," Ms. Wilkins added, "when you look at the economy from different perspectives, there is reason to be encouraged."

--David George-Cosh in Toronto contributed to this article.

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

(END) Dow Jones Newswires

June 12, 2017 14:57 ET (18:57 GMT)