The interest rate cut last month will buy Canada some time from knowing the true economic impact of the recent dramatic fall in oil prices, Bank of Canada governor Stephen Poloz said.
“The oil-price shock is an important setback in our progress toward full capacity, full employment and stable inflation because it is a net negative for economic growth,” Poloz said in a speech in London, Ontario.
“And because lower oil prices mean lower Canadian income, the shock will worsen the debt-to-income ratio of Canadian households, thereby increasing financial stability risks.”
Poloz maintained that the central bank’s move to cut its key lending rate to 0.75% from 1% “was intended to take out some insurance against both sets of risks.”
The governor is optimistic that the rate cut is set to lessen the impact of income and employment dips, including the increase in the debt-to-income ratio as results of plunging oil prices.
He added that oil’s full impact to the Canadian economy may not be “fully appreciated. And it may not be in every sector.”
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