Bank of Canada sees evidence exports poised to heat up

By Bryn Levy SASKATOON, Saskatchewan (Reuters) - Bank of Canada Governor Stephen Poloz is more hopeful than before about an export recovery but is not straying from his mantra that an interest rate cut is just as possible as a hike because the economic outlook is so uncertain. "We're expressing true neutrality on that question," Poloz told reporters after a speech on Thursday when asked if the bank's next move would be an increase or a decrease in its main overnight target rate. "I want to be clear that the outlook as we have it is that over the next couple of years, almost exactly two years from now, our modeling suggests that inflation could get back to about 2 percent. That's assuming all the other things we've got in there happen, which includes the rebound in exports." Poloz said he is more confident of exports and business investment strengthening after gaining a better understanding of how non-energy exports are performing relative to foreign demand from a new central bank study published on Thursday. But if the more upbeat scenario does not materialize and exports do worse than expected, overall inflation will fall again and drift further from the bank's 2 percent target, he warned. "The bank's analysis has given us a more granular interpretation of the export picture - and gives us more hope for the recovery of our non-energy export sector," Poloz said in a speech at a trade and export industry luncheon in Saskatoon, Saskatchewan. "There's a great deal of uncertainty around that outlook as we've expressed clearly today and in the past," he said later in a news conference. Poloz had previously confessed to being puzzled by Canada's lagging exports and said a recovery of the sector was a prerequisite for full economic comeback. The study of 31 sectors shows that while some industries had not rebounded in line with foreign demand, about 55 percent of non-energy exports have either been performing as expected or outperforming their foreign demand benchmark. These industries - which include machinery and equipment, building materials, pharmaceuticals, metal products and tourism - should lead the export recovery. The analysis also found that the recent depreciation of the Canadian dollar would help some industries, but that the majority of those sectors that have been doing well are less likely to benefit from the lower currency. Poloz said the analysis "feeds critically into our policy decision making." LOWER RATES IN LONG TERM The Bank of Canada held its main interest rate at 1.0 percent last week. Economists in a Reuters poll predicted it would stay on the sidelines until the third quarter of 2015, when it is expected to raise rates by 25 basis points. Poloz said Canadians should expect rates to be lower than in the past, even when they return to what is considered a "normal" level. "Our economy has room to grow. And, when we do get home, there is a growing consensus that interest rates will still be lower than we were accustomed to in the past," Poloz said. The ingredients are present for an export recovery, which in turn means that companies will have to invest to expand their capacity to take on new orders, he added. "We don't really have a prediction for how long it takes, but from conversations we're having, we're becoming more encouraged with time." The bank's hope is that exports and business investment become the main drivers of growth as the housing market cools and over-stretched consumers scale back spending. Higher consumer energy prices should push total inflation up in the next few quarters but this will be transitory and therefore "the downside risks to inflation remain important," he said. (Writing by Louise Egan and Randall Palmer; Editing by Phil Berlowitz and Richard Chang)