(Recasts with Poloz comment from news conference)
By Randall Palmer and Leah Schnurr
OTTAWA, Jan 20 (Reuters) - The Bank of Canada decided not to
cut interest rates on Wednesday but admitted it was not an easy
call, as concern about a rapid decline in the currency clashed
with an economic slump.
With a rate cut certain to drag the Canadian dollar lower,
the central bank held rates steady, despite calls by some for
action to stimulate an economy sideswiped by a prolonged drop in
the price of oil and other commodities.
"It is fair to say ... that our deliberations began with a
bias toward further monetary easing," Governor Stephen Poloz
said in a rare glimpse into the inner workings of the central
bank's Governing Council.
While some analysts called it a missed opportunity to help
the economy, the rate decision helped the battered Canadian
dollar CAD=D4 rebound from its lowest in nearly 13-years - at
least temporarily. CAD/
The Bank of Canada held its main policy rate at 0.5 percent,
where it has been since its last rate cut in July. But it
lowered its gross domestic product (GDP) forecast for 2016 to
1.4 percent from 2.0 percent and nudged expected 2017 growth
down to 2.4 percent from 2.5 percent.
The central bank acknowledged falling commodity prices
represented a "setback" for the resource-rich Canadian economy
and estimated that fourth-quarter growth had stalled.
The Canadian economy endured a shallow recession in the
first half of 2015 and has been trying to avoid a so-called
"double-dip" recession that would come with two quarters of
negative growth.
Poloz said the weak currency and stronger U.S. demand will
help spur an economic rebound and noted it had not incorporated
in its forecasts the "positive impact" of fiscal measures
promised by Prime Minister Justin Trudeau, who took office in
November.
The Liberals have promised to run deficits for three years
to boost infrastructure spending.
"They are passing the buck to the federal authorities to
boost spending," said David Watt, chief economist at HSBC Bank
Canada. "So now the monetary policy play becomes a vote on
fiscal policy."
In the days leading up to the bank's decision, markets had
priced in nearly a two-thirds chance of a rate cut as oil slid
relentlessly. But by Tuesday some were saying the bank should
hold its fire, rather than risk further weakness in the Canadian
dollar, also known as the loonie.
Even exporters complained the currency's speedy fall had cut
into their margins as the price of imported inputs climbed.
CURRENCY CONCERNS
The bank said the economy was in a process of reorientation
to non-resource activity, helped by stronger U.S. demand, the
lower Canadian dollar, and accommodative monetary and financial
conditions.
It said inflation was evolving broadly as expected, with
total inflation seen rising to about 2 percent by early 2017.
Its base-case projection showed the time period when excess
capacity will be eliminated being delayed until the end of 2017
from its October estimate of mid-2017.
"All things considered, therefore, the risks to the profile
for inflation are roughly balanced," the Bank of Canada said.
It also noted that financial vulnerabilities continued to
edge higher as anticipated, but it foresaw the housing market
and household indebtedness stabilizing as the economy
strengthens and household borrowing rates begin to normalize.
The bank highlighted the risk that a large and fast
depreciation in the loonie could boost inflation expectations.
The Canadian dollar CAD=D4 has already slid below 72 U.S.
cents, or C$1.3889 to the U.S. dollar, which is the rate used in
Wednesday's Monetary Policy Report. That gives more economic
stimulus beyond what is built into the assumptions.
However, oil has slid further below the bank's assumptions.
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(With additional writing by Andrea Hopkins; Editing by Paul
Simao and Chizu Nomiyama)