Tuesday, January 19, 2016

Should The Bank of Canada Stay Put?

Tim Shufelt of the Globe and Mail reports, Economists warn rate cut could erode confidence in loonie:
A potential rate cut by the Bank of Canada this week risks undermining confidence in the Canadian dollar, some prominent Canadian economists have warned.

Never before has the loonie fallen so far, so fast, against the U.S. dollar as over the past two years.

“Currency instability has become a concern, and we think the Bank of Canada must take note,” National Bank Financial chief economist Stéfane Marion said in a report on Monday.

“In our view, the Bank of Canada would be better to keep its powder dry this month and act, if need be, after the next federal budget when it will be better able to assess fiscal support to the economy.”

Trading in overnight index swaps currently implies the probability of a rate cut at about 60 per cent when the Bank of Canada releases its monetary policy report on Wednesday.

Economists calling for the key overnight lending rate to be maintained at 0.50 per cent say additional stimulus could test consumer sentiment. A cut to 0.25 per cent as expected by the market could bring about a “runaway exchange rate,” said Avery Shenfeld, chief economist at CIBC World Markets.

“The unprecedented pace of its decline risks an even larger hit to growth by shocking household confidence,” Mr. Shenfeld said in his weekly economic commentary on Friday.

He noted that the exchange rate serves as a barometer of the economy for many Canadians.

With the cost of travelling to the U.S. suddenly prohibitive to many, and the price of cauliflower a national talking point, the currency’s withered stature is very much on the mind of the average Canadian consumer.

Over the past two years, the Canadian dollar has lost a full 25 cents in value – a downward slope unmatched in steepness, Mr. Marion said.

Certainly, a great deal of downside is to be expected considering Canada’s current economic circumstances. Prices for crude oil and other resources such as copper are sinking to multi-year lows and domestic economic growth appears to be stagnating. Meanwhile, the U.S. dollar has been gaining considerable strength against major currencies worldwide.

But the losses should have been more like 10 cents, not 25 cents, Mr. Marion said. “Is the loonie out of whack with its fundamentals? We think so.”

While there are benefits to households, most notably through lower energy prices, the rising costs of imports are also passed through to consumers, who are finding some fruits and vegetables far more expensive these days. The effect is “fast eroding standards of living,” Mr. Marion said.

Another rate cut could erode consumer sentiment, both through additional currency depreciation and for the economic adversity a rate cut telegraphs, said George Davis, chief technical analyst at RBC Dominion Securities.

“Anecdotally, we’re already seeing some signs of erosion in consumer confidence.”

On the corporate side, a depreciated currency helps the beleaguered energy sector by making exports more attractively priced, all else being equal.

A further rate cut is needed to keep the dollar low, maintaining that cushion, veteran Canadian economist Ted Carmichael said in a blog post.

He sits on C.D. Howe Institute’s monetary policy council, which called for the Bank of Canada to hold rates as they are. There are four chief economists of Canadian chartered banks on the council, all of which advised against a cut.

Mr. Carmichael’s dissent said currency fears are overblown, and the idea that the loonie has fallen too far fails to grasp the magnitude of the commodity correction.

“I don’t think many people recognize that Canada’s commodity terms of trade in January, 2016, are 28 per cent weaker than they were at the lowest point of the Great Recession of 2008-09,” he said.
Let me state right off the bat that while I have tremendous respect for my former colleague Stéfane Marion, chief economist & strategist at the National Bank, I agree with Ted Carmichael, the Bank of Canada should stay on course and cut rates another 25 basis points on Wednesday.

In particular, Ted notes the following in his blog comment which you should all read:
The BoC's two rate cuts, in January and July 2015, combined with the US Fed's bias to hike rates, which it finally acted upon in December 2015, helped the depreciation of the Canadian dollar to keep pace with the continuing sharp decline in the commodity terms of trade.

I don't think many people recognize that Canada's commodity terms of trade in January 2016 are 28% weaker than they were at the lowest point of the Great Recession of 2008-09. And the prospect today for a quick rebound is not there as it was in early 2009, when the shale oil revolution had hardly begun, when China and other emerging economies were growing strongly and when the G20 was in the process of applying huge coordinated monetary and fiscal stimulus to the global economy. Indeed, most G20 leaders have recently been more focussed on cutting fossil fuel consumption than on providing stimulus for global growth.

In Canada, new governments at the federal level and in energy-rich Alberta, have promised to act on climate change, to increase infrastructure spending, and have already raised top personal income tax rates (while lowering "middle-class" tax rates). The combined effect of these measures over the next few years is unlikely to provide much, if any, real stimulus to growth. Indeed, continued uncertainty over resource royalties, payroll taxes for government run pension plans, and carbon taxes or cap and trade policies to address climate change seem likely to act as further meaningful drags on business investment and real GDP growth.

So the Bank of Canada should stay on course and cut the policy rate by another 25 basis points next week on January 20.

This is the recommendation that I made to the Bank of Canada in my role as a member of the C.D. Howe Monetary Policy Council (MPC). Some members of the were reluctant to call for another rate cut because they were concerned that doing so could trigger a further sharp depreciation of the Canadian dollar. Several suggested that the currency could overshoot its' "fair value" to the downside. One even suggested that the BoC could trigger a currency crisis.

In my opinion, these fears are way overblown. The depreciation of the Canadian dollar so far has just kept pace with the deterioration of Canada's commodity terms of trade. Ahead of the BoC decision next week, economists are about evenly split in their forecasts with an increasing number calling for a rate cut as commodity and equity markets weakened sharply over the first two weeks of January. The bond and currency markets have already priced in a better than 60% probability of another 25 basis point rate cut on January 20. If the BoC decides not to cut rates the Canadian dollar is likely to rally, preventing it from acting as the cushion to the terms of trade drop that it needs to be.

I would also point out that those arguing against a rate cut are mostly based in Ontario and Quebec. As we have seen in the past in Canada, regional views on appropriate monetary policy sometimes vary. Those in the non-resource regions of central Canada appear to want to have the benefits of lower crude oil and other commodity prices (in the form of lower consumer prices for gasoline and lower resource input costs for for manufacturing), but don't want to have to share the costs in the form of a weaker Canadian dollar that cushions the impact on resource industries but increases central Canadians' costs of imported food, Florida vacations and BMWs.

BoC Governor Poloz (and the Governing Council) has pursued the same approach to monetary policy in the face of a severe commodity price shock that his predecessors Mark Carney, David Dodge or Gordon Thiessen would have followed. If the current Governing Council is concerned about the Canadian dollar falling too much, it should cut 25 bps to 0.25% and provide forward guidance that the policy rate is expected to remain at that level, conditional on underlying inflation remaining on a projected path back to the 2% target by the end of 2017.
Now, some economists think it's impossible for the Bank of Canada to cut rates and give forward guidance at the next meeting but Ted's point on the depreciation of the Canadian dollar keeping pace with the deterioration of Canada's commodity terms of trade is bang on.

But another former colleague of mine, Luc Vallée who is now the chief strategist at Laurentian Bank Securities, also disagrees with Ted Carmichael and came out with an op-ed in the Globe and Mail, Is a devalued loonie worth the pain? Results may vary:
On Jan. 7, during his first speech of the year on the topic of policy divergence, Bank of Canada governor Stephen Poloz said the U.S. dollar’s rise “may be causing a moderation of U.S. GDP growth through higher imports and lower exports, but it is not causing a softening in U.S. demand. Rather, the stronger U.S. dollar diverts some of the growth in U.S. demand outward, boosting growth in other countries.”

So, the rising U.S. dollar does not stifle global growth, he said – “it redistributes it.”

While this is true in principle, large currency moves are not quite that co-operative in practice. And by this, I mean that the redistribution of growth does not happen magically, disappearing from the United States and reappearing elsewhere, like teleported Star Trek characters. The end result may disappoint or, worse, be disruptive.

Let’s illustrate why, using a simple example of two countries, A and B, selling similar products at similar prices.

One day, country A’s currency appreciates. Obviously, consumers living in both countries should now want to buy less from A and more from country B, where goods are now cheaper, taking into account the currency exchange. Demand has not changed; it has been diverted from A to B.

But will B deliver? Firms in B will have to expand operations if they don’t already have the excess capacity. For that, they must access credit – not always an easy task. They will then need to build expanded facilities and hire and train workers, which takes time. Firms must also learn how to export their products, how to market them in A and make sure they satisfy standards and regulations there; for many firms, this will require new expertise, managing new risks and cost money.

Moreover, customers will have to pay for the extra shipping cost and deal with customs, making buying goods from B less appealing for residents of A. More important, firms in B have to be certain that the appreciation of A’s currency will be permanent; otherwise, they could be pouring money into pointless investments.

Meanwhile, in A, workers are being laid off as firms are curtailing their own expansion plans and are making less profit. They may soon have idle assets to liquidate, sometimes with very little resale value, forcing them to take a capital loss. Demand in A, where jobs are being lost, will most likely fall before it increases in B, where new workers will eventually be hired.

Complicated enough? Yet, it is even more intricate than that in real life, with technology fast improving, tastes constantly evolving and regulation and taxes changing without warning, forcing firms to endlessly adapt. All this is without taking into account the competition that could arise from somewhere else and ruin the expansion plans of businesses located in B. It could be years by the time we get the full supply response we expect from B. Even then, the final results may only be partial, costly for both countries and likely to hurt unemployed workers in A and importing businesses in B.

Such realities go a long way toward explaining why the U.S. economy is growing below our expectations and why, despite the appreciation of the U.S. dollar, Canada’s exports (and those of Europe and Japan, for that matter) are not picking up as fast as anticipated.

From 1995 to 2005, when the Canadian dollar was weak, half a million jobs were created in Canada’s manufacturing sector. All were lost in subsequent years when the loonie appreciated while oil prices hovered around $100 (U.S.) a barrel. Since the middle of 2014, when the loonie started to fall again, Canada has added only 50,000 new manufacturing jobs – just 10 per cent of the jobs gained in the earlier episode! Granted, it took 10 years to get there before. But how long will it take this time?

The game of snakes and ladders is different today. Canada is larger, the planet is more globalized, manufacturing requires more technology than labour and we have competition in our backyard that we did not have in the 1990s. Mexican firms have had years to benefit from the North American free-trade agreement and China joined the World Trade Organization in 2000. Both are now well established in the United States and will be difficult to dislodge. The Mexican peso has kept pace with our currency’s depreciation; against them, Canadian firms are no more competitive than they were last year. It could take a very long time before we regain our footing – if ever.

The World Bank also estimates that increased reliance on global supply chains by manufacturers, such as Apple and Cisco, has weakened exports’ response to currency devaluation by as much as 40 per cent. A global supply chain is a multiple-stage process in which inputs from one or several countries are imported to another country to be marginally transformed or assembled before being exported to yet another one, where similar operations are performed again. The gain in competitiveness from one country’s devaluation is limited to the small share of the value its local firms add to their products.

So commentators who are concerned about the potential impact of a stronger U.S. dollar on global growth are right to worry. Contrarily to what Mr. Poloz’s reassuring words would lead us to believe, the transmission of exchange-rate variations is uncertain, imperfect, lengthy and disruptive. Its final effects are undeniable in the long run: Currency appreciation reduces growth in the country with the appreciating currency and favours growth elsewhere. However, nobody knows how long it takes for this outcome to emerge and nothing guarantees that it happens at a ratio of one-for-one, or that what happens in the process is even worth it in the end.

So why are we letting the U.S. dollar appreciate? An answer is that floating exchange rates adjust automatically to changing economic circumstances and not much can be done about it. Another is that there is often a disconnect between the framework that economic policy makers use to guide their actions and what is happening in the real world. Systematically, policies are deployed in the hope that the real world will conform to these oversimplified views, even though we now know that they mostly don’t.

Rather, we should recognize that large and rapid currency devaluations are indeed potentially disruptive to global growth, as they have to be digested through the bowels of the real economy and financial system before they bear their fruits. Too much disruption can generate irreparable damage and end up being counterproductive, even if the end outcome may appear to conform to policy-makers’ expectations.

In other words, policy-makers may correctly predict the nature of the desired income shifts, but the rarely resolve the issues around whether they are worth it in the first place, and how to optimize the process that brings us to the preferred outcome. These are the most difficult policy questions, yet the most relevant.

It’s a lesson that we should have learned from the financial crisis of 2008-09 and integrated into our policy-making, but we seem to have already forgotten it and moved on to new challenges. Deregulation of the financial sector was supposed to be good in the end, according to policy-makers. But the process created a mess much bigger than its anticipated benefits. Today, eight years after the financial crisis, we certainly appear to be still picking up the pieces from a shattered world economy on life support for the indefinite future.

So what next? Some would argue that, given these constraints, the Canadian dollar should be allowed to fall even further. However, the Bank of Canada should resist the temptation of lowering its policy rate next week, which would precipitate such devaluation.

Given the risks identified in its last monetary policy report, the bank would be totally justified in lowering rates. But such a move would probably succeed only in putting downward pressure on the dollar without encouraging much creation of credit. Resorting to extreme relative price variations to settle our problems could thus be unproductive. For now, at least, it would be best to hope for the exchange rate to stabilize and give markets the time they need to work through the proper adjustments. Further devaluation would only add to the uncertainty.
These points seem to have struck a chord with Canadian exporters who fear a bank rate cut and are even calling for a rate increase at the next meeting:
The head of Canada’s largest exporters association has a message for Bank of Canada Governor Stephen Poloz: don’t do us any favours.

Speculation Poloz will cut interest rates again as early as Wednesday is fuelling the Canadian dollar’s precipitous fall and may be doing more harm than good, says Jayson Myers, chief executive of Canadian Manufacturers & Exporters. Exchange rate volatility is putting a chill on business decisions and renewed talk of lower rates is stoking worries about the economy’s health, all of which is bad for confidence, he said.

“My advice right now would be to even take a look at increasing interest rates by a quarter of a point,” Myers said by telephone. “Interest rates are low already. A little bit of dollar stability would be better.”

If Poloz can’t even get exporters to support a rate cut, he’s got a serious buy-in problem. Myers isn’t the only one flagging the shrinking benefits and mounting costs of additional monetary easing. Last week, two bank chief executives warned lower rates would hurt their margins.

That’s on top of a growing chorus of economists and investors warning historically low rates are distorting the economy by stoking an already hot housing market and will do nothing to help embattled oil producers.

There’s also the argument a rush to the currency bottom only rewards marginal companies and will turn Canada into a low-wage producer of manufactured goods servicing the U.S. economy.

With the currency sinking to fresh 13-year lows against the U.S. dollar, consumers are meanwhile seeing their purchasing power evaporate.

Policy makers have already cut rates and “it doesn’t seem to matter to them that has very little effect,” said Jeff Herold, chief executive officer at J. Zechner Associates Inc., which manages about $2 billion. “He has impoverished Canadians.”

Of 32 economists in a Bloomberg survey, 14 forecast a cut on Wednesday, while 18 say no change. Bank of Canada officials declined to comment on this story when contacted by Bloomberg.

The loonie has depreciated 11.5 per cent in the past three months, marching lower with crude oil prices. It’s down 29 per cent since Poloz took the helm at the central bank in June 2013. Government bond yields reached record lows last week, heightening the sense of concern.

Swaps traders have fully priced in at least one rate cut by April, and a more than 50 per cent chance of a second by the end of this year. They’re even placing a one-in-10 chance the benchmark rate will be negative 0.25 per cent by December. A month ago, the chances of even one rate cut for all of 2016 were below 50 per cent.

“As a central banker you have to say at some point, ‘I have to give the exchange rate adjustment time to work through as there’s a lot of Canadian dollar stimulus in the system already,”’ said Andrew Spence, head of liquid alternatives at Scotia Institutional Asset Management and an adviser to former Bank of Canada Governor David Dodge in 2002, coincidentally the year the Canadian dollar reached 62 U.S. cents, the lowest ever.

It’s not like the economy is all doom and gloom. There is growth, albeit slow, with indications non-energy exporters are responding to a strengthening U.S. economy and weaker currency. Another rate decision is less than two months away; by then the central bank will have more information, including details on what the federal government plans to do in its 2016 budget.

Poloz lowered the overnight rate twice last year, in January and July, saying the oil shock required a safety valve and lower borrowing costs would help manufacturers pick up the slack. His message lately has been even with interest rates at 0.5 per cent, the central bank can go lower if necessary. The financial system could handle rates as low as negative 0.5 per cent, and the central bank could also deploy quantitative easing, Poloz said in a Dec. 8 speech.

Up to now, Poloz hasn’t had much choice, being the only game in town, with the previous government politically committed to balancing the budget and reducing spending. Calls are growing louder for the federal government to shoulder more of the stimulus burden by boosting spending.

Prime Minister Justin Trudeau won elections in October partly on plans to run deficits to spur growth over the next three years, but that spending will have only a marginal impact on the economy, especially given the Liberals are sticking to a pledge to return the budget to balance in four years.

Poloz also disputes his intention is to weaken the currency, claiming falling oil prices are almost wholly responsible for the depreciation.

Yet, with interest rates already at record lows, it’s hard to argue a rate cut is aimed at anything less than a weaker currency, said Scotiabank’s Spence.

“There is a lot of stimulus in the system from the exchange rate already, so what would an additional interest rate reduction achieve?” Spence said. “More exchange rate depreciation primarily, and it could encourage a Canadian dollar overshoot.”

Further dollar weakness won’t be seamless.

A weaker dollar isn’t unambiguously good for the nation’s economy, even for exporters because of the volatility and rising costs for imports. That’s important for an economy such as Canada’s which is more import-dependent than most of its industrialized peers.

How muddy is the picture? Ontario, the manufacturing heavy province seen as the big beneficiary of a weaker dollar, also makes up about 60 per cent of the nation’s imports, well above its share of the economy.

A weaker currency is also sure to become a major political issue. Canadians tend to notice when their buying power shrinks relative to their U.S. cousins, especially given 90 per cent of the population lives within 100 kilometers of the U.S. border.

As the currency was hitting record lows back in January 2002, then Finance Minister Paul Martin and the Bank of Canada’s Dodge spent the month trying to alter perceptions of the currency, including a trip to New York, arguing the weaker dollar was hurting the chances of a recovery.

The depreciation represented “a pay cut to every Canadian, a drop in our standard of living and a reflection of the fact that Canadians are getting poorer as Americans are getting richer under the watch of the government,” said one lawmaker in 2002 critical of then Finance Minister Paul Martin’s handling of the economy. Who was that? Treasury Board President Scott Brison, now a key cabinet minister and top economic aide to Trudeau.

Plus, there are the confidence issues.

“Cutting interest rates at this point’s mostly about weakening the exchange rate to help exports, and there the hazard is the exchange rate is already weakening on its own,” said Avery Shenfeld, chief economist at CIBC World Markets. “There is a risk of setting off too quick a reduction in the exchange rate that hurts consumer confidence.”
I don't know what all the fuss about, truly. I told my readers about Canada's perfect storm back in January 2013 and continued to warn everyone to short the loonie in December of that year because I saw oil prices going much lower.

Given my Outlook 2016, I see no reason to change my views on Canada, oil or the loonie and think negative rates are coming to Canada if things get really bad in the global economy (even Zero Hedge is warning of negative rates coming to Canada, a bit prematurely, of course).

And as I discussed in my recent comment on loony markets and loonie forecasts, I see the CAD hitting 65 U.S. cents before it settles around 68-70 U.S. cents for a long time.

The loonie is a petro currency. Period. Steve Poloz even stated it in a recent speech at Ottawa City Hall, where he explained that the weak loonie is the result of weak prices for Canada's commodities, particularly oil:
"It is not a coincidence that the Canadian dollar is about where it was back in 2003 and 2004," Poloz said. "Oil prices are also about where they were back then.

"The depreciation of our currency is a natural part of the process."

Following the speech, he bristled at the suggestion during a media Q&A that he was "cheerleading" the loonie's decline.

"It's not something to cheer for," he said. "We would of course prefer oil prices to be a little higher."

Poloz explained that because Canada is a net exporter of commodities, while the U.S. is a net importer, the impact on the terms of trade for the two economies has been different.

He said that fact suggests the divergence between U.S. and Canadian monetary policies will continue, and the loonie is likely to stay low for the foreseeable future.
Unlike Stéfane Marion, Luc Vallée, and the rest of Canada's bank economists, I think Stephen Poloz is doing a great job and he's right to fear global deflation even though he will never state this publicly.

There is a real risk the U.S. economy will slow down considerably in the second half of the year, at least that's what the stock market is telling us. Add to this the risk of another emerging markets crisis and the possibility of global deflation hitting North America, one can argue, as I do, that unlike Janet Yellen and Stanley Fisher, Stephen Poloz is ahead of the global deflation curve.

The lack of serious inflation pressures and the risk of debt deflation is the reason why Canadian bonds are soaring as yields fall to to record lows despite widespread and misguided media hype of soaring food inflation (see Brian Romanchuck's latest, Canadian Bonds, The Currency, And Cauliflower).

So what gives with all these warnings on the declining loonie and its nefarious effects on the economy? There may be another reason why Canadian bank economists are coming out to warn the Bank of Canada against cutting the rate again. Their big bosses are telling them to do so!!

In fact, Greg Quinn and Doug Alexander of Bloomberg report, Canada Bank CEOs Say More Poloz Rate Cuts Would Hurt Margins:
A Bank of Canada interest-rate cut next week threatens to take a toll on lending margins, executives at two of the country’s biggest financial institutions said.

Victor Dodig, chief executive at Canadian Imperial Bank of Commerce, and Toronto-Dominion Bank’s Bharat Masrani warned interest rates falling to record lows may compress their net interest margins, referring to the difference between what a bank pays for deposits and charges for loans.

“I don’t think we need a rate cut,” Dodig said Tuesday at a banking conference in Toronto. “As it gets closer to zero it becomes more challenging, and it will have more of a deteriorating effect” on margins, he said.

Speculation is mounting that a fragile economy will force Bank of Canada Governor Stephen Poloz to cut interest rates again, possibly next week, after two reductions in 2015. The comments from Dodig and Masrani illustrate how the debate on stimulus is turning toward possible side effects, as indicators continue to highlight how damage from a drop in crude prices is widening beyond the oil patch, leading economists to say further action now is justified.

“Obviously rate cuts don’t help” earnings, Masrani said. “A lot depends on market reaction to it, how competitive reaction to it and we’ll see how that plays out.”
Other Tools

Poloz cut rates twice in 2015, to 0.5 percent from 1 percent, and the record low is 0.25 percent set in 2009. Poloz said last month he could deploy other tools if needed to deal with a fresh shock. Those tools include taking interest rates to negative 0.5 percent or using massive asset purchases known as quantitative easing.

Bank executives expressed concern about lower rates even as they agreed the slide in crude oil prices toward $30 a barrel represents a challenge for Canada, the Group of Seven’s biggest crude exporter. Bank of Montreal CEO Bill Downe said Canada’s economy will grow by as little as 1 percent this year and the outlook is “modestly gloomy.”
Minority View

Credit Suisse analyst Axel Lang Tuesday joined other economists in saying the plunge in commodity prices means another rate cut is justified next week. Economists at Bank of America Merrill Lynch, Capital Economics, HSBC Bank Canada and Standard Chartered Bank are also calling for a quarter-point reduction next week. That’s still a minority view with 18 of the 23 responses in a Bloomberg News survey calling for no change.

Cutting rates may also fuel price gains in a housing market already at risk in some cities from overvaluation. One of Canada’s top bank regulators, Office of the Superintendent of Financial Institutions Deputy Superintendent Mark Zelmer, reiterated in a speech he will set tighter capital requirements to guard against a housing crash.

Poloz said at a speech last week there is still evidence the global economy is gaining momentum and that the positive forces from the commodity price drop are beginning to dominate Canada’s economy, with the biggest being a boost to exporters from a falling Canadian dollar.

“The Bank of Canada can afford to be patient,” Jimmy Jean, a strategist in the fixed-income group at Desjardins Capital Markets in Montreal, wrote in a note to clients Tuesday. Poloz will probably get some help later this year as the federal government brings in a budget with stimulus spending, he said.

The positive signals don’t convince Lang at Credit Suisse. “The export sector is unlikely to be strong enough to outweigh the negative income shock that will continue to work its way through the economy in 2016,” he said in a research note Tuesday.

National Bank of Canada CEO Louis Vachon said at the conference Bank of Canada rate cuts as well as monetary policy and competitive pressures in the past year have led to increases in net interest margins on loans that offset “almost one-for-one the negative pressure on the deposits."

"For 2016, I would expect roughly the same thing, either flat or maybe losing one beep per quarter in the current interest rate environment," Vachon said, adding that the Montreal-based lender anticipates a continuation of trends seen in 2015.
Louis Vachon is a smart guy but if he or any other big Canadian bank CEO thinks they will be able to ride the storm ahead with minimal damage, keeping their return on equity high, they will be sorely disappointed.

Also, they can whine all they want about the Bank of Canada cutting rates to record low levels, eating away at their margins, but they better get used to it and the fact that if things get really bad in the global economy, negative rates are coming to Canada.

Below, I embedded a recent speech Bank of Canada Governor Stephen Poloz gave at the Mayor’s Breakfast Series in Ottawa, Life After Liftoff: Divergence and U.S. Monetary Policy Normalization. Listen to his comments on oil, the Canadian dollar but also on the downside risks ahead.

Also, Bloomberg's Doug Alexander explains why some of Canada's bank CEOs don't want to see more rate cuts. No doubt about it, 2016 will be a bad year for Canadian banks, so they should sit tight and trust our central banker. He's a very sharp guy with tremendous experience and unlike other central bankers, he understands the very real threat of global deflation and is doing everything he can to be ahead of the curve. Canadian banks should support, not criticize him.

Update: The Bank of Canada held its key interest rate steady at 0.5% on Wednesday. "The dynamics of the global economy are broadly as anticipated," the BoC said in a statement. "The bank … judges that the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 0.5 per cent."

The Bank cut its growth forecast but sees an upturn ahead. Hope it's right but have my doubts. I guess the precipitous decline in the loonie made it hold off on further cuts, for now. If growth doesn't pick up, it will be forced to cut rates later this year. I embedded the press conference below.

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