I think if I'd been at home this past two weeks, slaving over a hot keyboard in a cool basement, rather than being down south, nursing a cool beer by a warm pool, that I'd probably have posted to the blog about ten times. The ECB starting quantitative easing....the Bank of England governor musing about low taxes paid by tech companies....the "historic blizzard" in the US northeast....US-Cuba talks....Target pulling out of Canada, and so on. And then there was the Bank of Canada....
After the Bank's monthly board meeting in mid-January, moon-faced Governor Stephen Poloz shocked just about everyone by announcing a 25 basis point reduction in the Bank's reference rate, bringing it to a new low of 0.75%. Poloz cited the risks to the Canadian economy posed by low oil prices, and revealed that the Bank's forecast for GDP growth in 2015 had been lowered to 2.1% from 2.4% previously.
It's hard to know where to start with this. Although there's no question that low oil prices are bad news for Alberta, and to a lesser extent Saskatchewan and Newfoundland/Labrador, they're the best possible news for the rest of the country. Layoffs and cancelled investments are already under way in the producing provinces, but you'd be hard-pressed to find anyone in Ontario or Quebec or Manitoba who isn't entirely delighted by the fall in fuel costs. The US, itself a huge energy producer these days, is expecting the net effect of lower oil prices to be very positive for the economy there, thanks to the boost it provides for consumers, as well as for sectors of the productive economy that are large energy users.
It's legitimate to wonder whether the recent turn of events in the energy market is so out of line with past experience that the Bank of Canada's models are simply not capturing it correctly, and are underestimating the beneficial impact on household consumption in particular. But even if you accept that the models are correct, how is a 25 basis point rate cut supposed to help? Even before the rate announcement, the Canadian dollar had fallen by more than 20 percent against its US counterpart, as a direct result of the collapse in oil prices. Since the Bank's move, it's down another five percent. If this huge depreciation isn't enough to give a boost to the non-oil economy, be it manufacturing or tourism, what possible reason can there be to hope that reducing already rock-bottom interest rates will be of any help?
The answer, God save us all, can only be that the Bank of Canada is worried about the housing sector. That's right, the same housing sector that the Bank itself admits may already be overvalued by as much as 30 percent, and which Deutsche Bank researchers recently asserted might be overvalued by twice as much as that. Why does the Bank think it advisable to stoke that particular bonfire?
What makes all of this particularly bizarre is that the Federal government's fiscal policy is about to resume pushing in the opposite direction. As I've noted here in the past, the Tories became so over-excited about the possibility of a fiscal surplus that they went ahead and announced a series of tax cuts before the money was even in the bank. Now, thanks to the oil price rout, that money isn't there, so the budget will be in deficit again in 2015, despite all of the Tories' bragging about fiscal rectitude. And so, Finance Minister Joe Oliver has delayed his budget announcement until April, when it's generally expected that he will announce a new round of spending cuts, which will directly undermine the economic growth that Governor Poloz is so desperate to keep on track.
In truth, what we see here is the past half-decade of inept policymaking -- and not just in Canada -- in microcosm. Ideologically driven and economically illiterate deficit cutting, which the central bank has no choice but to offset with unprecedented levels of monetary stimulus which, it becomes more evident by the day, they have no idea how to get out of. Indeed, many Canadian forecasters, not one of whom had any inkling about this month's rate move, are now starting to suggest that the Bank of Canada may well cut rates again. Well, I suppose if the hole you've dug for yourself is this deep, a few feet more won't make much difference, right?
No comments:
Post a Comment