UPDATE 4-Bank of Canada surprises with dovish tilt after holding rates

Published 2016-10-19, 06:00 p/m
© Reuters.  UPDATE 4-Bank of Canada surprises with dovish tilt after holding rates
BAC
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(Recasts with comments from economists on communication shift)

By Andrea Hopkins and Leah Schnurr

OTTAWA, Oct 19 (Reuters) - The Bank of Canada cut its growth forecast on Wednesday and said it actively discussed adding more monetary stimulus to speed up the nation's economic recovery, surprising financial markets by shifting tone dramatically after its initial rate decision.

Citing a looming slowdown in Canada's long housing boom and a weaker outlook for exports, Bank of Canada Governor Stephen Poloz said the central bank had considered easing monetary policy but was held back by global uncertainty.

Poloz revealed the stimulus discussion in his opening statement to reporters more than an hour after publication of the rate decision, wrong footing financial markets that were not expecting the dovish shift.

"If you look at the press release at 10, that had a very balanced tone and you would have said 'Okay, day over, nothing to see here.' And then you get to the press conference opening statement and it's almost like a big bombshell," said Emanuella Enenajor, Canada economist at Bank of America Merrill Lynch (NYSE:BAC).

David Watt, chief economist at HSBC Canada, said there was "clearly a disconnect" between what the bank said early in the day and what was communicated to reporters later in the news conference.

"The markets obviously got two different versions, two different interpretations, of what was said," said Watt. "You would like to have more consistency."

Poloz has upset market players with unexpected moves in the past, including a shock January 2015 rate cut.

It was the second time in six months the central bank admitted it had considered adding more stimulus to the economy to counter persistent disappointments in growth and exports.

The bank's comments cemented the belief that Canada will not raise rates in the foreseeable future, and could even cut rates, even with the U.S. Federal Reserve expected to hike further.

Asked about the move to reveal the rate cut discussion only after the rate decision was released, a spokeswoman for the central bank said Poloz's open statement to reporters is designed to fill the gap between the quarterly monetary policy report and press release announcing the rate decision.

"The opening statement ... (offers) insight into which issues were really on the table during the deliberations and how those issues influenced the decision," spokeswoman Josianne Menard said in an email.

"We think this helps people understand better the thinking behind the decision."

As expected, the bank held its overnight rate at 0.5 percent, where it has been since July 2015, even as it trimmed GDP forecasts, saying downward pressure on inflation will continue while economic slack persists.

The bank said the recent move by the one-year-old Liberal government to further tighten mortgage rules will cut 0.3 percent from GDP through 2018 by cooling housing sales, and it cut its forecast for GDP growth to 1.1 percent in 2016, down from 1.3 percent three months ago.

Poloz said uncertainty around the U.S. election and business investment, the Canadian housing market, and the commodity cycle kept the bank from adding stimulus.

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