Bank of Canada says economy weaker than expected, frets over oil

TORONTO (Reuters) - Bank of Canada Governor Stephen Poloz on Thursday said the economy was weaker than forecast and predicted low oil prices would cut growth, comments likely to reinforce market expectations that the pace of future rate hikes will ease off.

Poloz, speaking a day after the central bank kept interest rates on hold, repeated that more tightening would be needed to keep inflation on track but added the pace would be decidedly data-dependent.

"It is fair to say that the data released since our October Monetary Policy Report have been on the disappointing side ... the economy has less momentum going into the fourth quarter than we believed it would," Poloz said.

Much of the bank's discussion ahead of the interest rate announcement on Wednesday had been focused on oil, he said. Prices for crude, one of Canada's main exports, are sinking amid a supply glut and this is hurting Alberta, the western province which is home to the domestic industry.

"It is already clear that a painful adjustment is developing for Western Canada and there will be a meaningful impact on the Canadian macroeconomy," said Poloz.

The sector could suffer further harm if trade tensions between the United States and China cut demand, he added.

A slump in oil prices badly hit the economy in 2015, and the damage this time round should be less on a dollar-for-dollar basis, Poloz said, given consolidation in the energy sector since 2014.

The central bank has lifted rates fives times since July 2017 as the economy strengthened and neared capacity. But amid the oil price shock, market expectations for another rate hike on Jan. 9 have plummeted.

Poloz noted that the economy had been operating near capacity for a year, unemployment stood at its lowest level in decades and inflation was on target.

It was natural the bank would seek to raise rates from their current low levels, he said, while acknowledging the potential danger posed by homeowners who had borrowed heavily.

"The stock of risky mortgages remains high. Over time, these mortgages should become less risky as they are slowly paid down," he said.

"Still, this vulnerability will persist for many years."

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