Bank of Canada governor defends interest rate cut in UK speech

Ottawa, Stephen Poloz stood on an international stage Thursday and defended his surprise January decision to cut the Bank of Canada’s key interest rate.

In prepared remarks of a speech delivered in London, the central bank governor said he had to react to the surprising speed and magnitude of the oil-price shock.

He also acknowledges the bank was well aware it was about to catch everyone off guard.

“We knew that financial markets would be surprised by the move in January, and we generally prefer to avoid surprises,” Poloz says in his address to the Canada-United Kingdom Chamber of Commerce.

The central bank slashed its rate for the first time in years to 0.75 per cent from one per cent. It argued the move would provide “insurance” for Canada’s oil-exporting economy amid plunging crude prices.

Observers have questioned Poloz’s decision, with some suggesting the central bank’s credibility may have taken a hit as a result.

“We thought that it would be best to act sooner rather than later,” Poloz said in his speech, titled “Central Bank Credibility and Policy Normalization.”

“This (oil-price) shock surprised everyone, and the fact that it is so large and happened so quickly means that many of us have had to work hard to fully grasp all of its implications.”

Poloz said slashing the rate bought the bank time to assess the evolving economic impact of the plunge.

He stressed the central bank will do what it thinks is necessary to fulfil its mandate of guiding the country towards a two per cent inflation target.

Since the rate cut, Poloz said inflation has declined as the bank expected. He also said financial conditions have eased and crude prices have stabilized in a range “reasonably close” to the bank’s January predictions.

“This made us feel increasingly comfortable with the amount of insurance we had already taken out,” he said, explaining why the bank decided to hold the rate steady earlier this month.

The Bank of Canada’s next rate announcement is scheduled for April 15.

Looking forward, the negative impacts of the oil slump are only starting to appear in the country’s economic data, while the expected offsetting positives will take longer to surface, Poloz said.