Grilling Governor Poloz

I don't know if anyone on the House of Commons Finance Committee reads this blog, but some of the questions put to Bank of Canada Governor Stephen Poloz when he testified to the committee on Tuesday are very similar to those I'd be putting to him, given the opportunity.

Notably, Poloz was asked to justify the rate cut in January that took markets completely by surprise; he responded that it was not the Bank's intent "to shock or frighten people".   He was also quizzed about his use of the word "atrocious" to describe the economy's near-term prospects early this year; since Poloz made that statement, the economic data have been mediocre rather than disastrous, and the Bank has taken no further action to follow up on the January rate cut.

More substantively, Poloz was asked to comment on the view expressed by many international agencies, such as the OECD, that Canada's housing market is in the midst of an unsustainable bubble. Poloz robustly disputed this, as is his right -- except that it's not so long ago that he revealed that the Bank's own analysis showed that the market was overvalued by as much as 25 percent, and prices in markets such as Toronto and Vancouver have only moved higher since he made that statement.

This capriciousness is important right now, because the near-term outlook for the economy seems to be changing. In making its monetary policy announcement in early April, the Bank implied that the worst impact of the oil price plunge was already behind us. This suggests strongly that the Bank is no longer expecting to ease policy any further. The fact that oil prices have bounced back somewhat in recent weeks points to the same conclusion. And yet...unsurprisingly, the rise in oil prices has quickly pushed the Canadian dollar higher. Given that the Bank was clearly counting on a weaker dollar to provide stimulus to the non-oil sectors of the economy, the rise in the exchange rate is an unwelcome development that just may just put a further rate cut back on the agenda.

Central banks face this type of quandary all the time. The problem right now for Canadian markets is that Governor Poloz's track record makes it almost impossible to guess which way the Bank will jump.