TORONTO (Reuters) — The head of the Bank of Canada said a slump in oil prices is having an "atrocious" effect on the Canadian economy but a cheaper currency and incipient U.S. revival should help exports drive a recovery, the Financial Times reported on Monday.
Governor Stephen Poloz said in an interview with the newspaper that the central bank still had many options to help the economy if needed. These included pledges to keep interest rates low for a prolonged period of time — a practice known as "forward guidance" — as well as asset purchases.
Poloz defended a surprise rate cut in January, saying that falling oil prices meant it had become impossible to return the economy to capacity within a two-year horizon.
"When the oil shock came, it was clear we would no longer be able to close the output gap by 2016, but by 2017," the governor said in the interview. "Since we had some firepower, we took some insurance and cut rates."
Poloz struck a cautious note on the state of the Canadian economy, the article said.
"The first quarter of 2015 will look atrocious because the oil shock is a big deal for us," he said, adding that capital expenditure could fall by as much as 10 per cent as a result of energy companies cutting investment.
He added that even though a lower oil price should increase domestic demand by boosting disposable income, the negative effects from the impact on the energy sector were widespread.
"In theory, lower oil prices mean more money in consumers pockets, but…if an oil company cancels (an investment) project, laying off a worker, that guy will not have the money to buy a new pick-up truck. That spreads pretty quickly," Poloz said.
The depreciation of the Canadian dollar had taken time to boost exports, he said, as thousands of exporting companies had to shut down operations in recent years because of the strength of the currency and U.S. economic weakness.
But the article said the governor remained confident that a lower exchange rate could eventually spur a recovery, as well as help the economy rebalance away from the oil sector.
"The manufacturing sector is turning around nicely. We were losing a lot of the auto parts manufacturing to Mexico. That calculus has shifted," he added.