OTTAWA – Bank of Canada governor Stephen Poloz has had a good run of it lately.
In the central bank version of the children’s boast “look ma, no hands,” the first year governor has made the Canadian dollar disappear — 10 per cent of its value, at least — while keeping his hands firmly in pocket.
Analysts anticipate more of the same Wednesday when the bank is expected to announce – for the 29th consecutive time dating back to September 2010 – that it is leaving its trendsetting overnight interest rate at one per cent.
The news will come in what Poloz says, rather than what he does.
There are reasons for Poloz to be optimistic, say analysts, but few expect him to show too much of it for fear of boosting the loonie.
Although Poloz has denied interfering, the fact remains that a weak loonie plays into two of his policy goals — help restore inflation to the two-per-cent target and make Canadian exports more competitive in global markets.
Economist Jimmy Jean of Desjardins Capital Markets notes that Poloz will no longer be able to flag disinflationary risks he has in recent months, since prices have firmed to about 1.5 per cent. As well, he will need to acknowledge that with a 0.5 per cent GDP hike in January and Tuesday’s strong manufacturing data for February, the first quarter won’t be as weak as many feared.
Still, expect the central banker to highlight that as long as exports remain the Achilles heel of the economy, business confidence will remain muted and investments modest.
“He’ll likely put some emphasis on the fact that the composition of growth has been disappointing, in order to deliver as dovish a statement as he can,” said Jean.
Such talk, as well as dropping the tightening bias to a neutral stance on the future direction of interest rates, has worked well for Poloz. The dollar has swooned from parity to under 89 cents US in the third week of March, although it has since recovered somewhat to the low 91-cent US territory.
Bank of Montreal chief economist Doug Porter says Poloz likely would prefer it to weaken further.
“So I suspect he’ll be very careful not to sound too upbeat on the outlook,” he said. “They’ll probably say the economic outlook, looking past the weather, is evolving broadly as expected. They could also play up the international risks, concern over the Ukraine and disappointments in the emerging markets, which is completely fair.”
But most economists see Canada’s economy as marginally in better shape than what Poloz was looking at in January’s monetary report, when severe weather conditions contributed to a 0.5 per cent fall-back in December GDP. That was reversed by an identical rebound in January, and data so far point to a positive February.
February also saw a 3.6 per cent jump from the previous month in exports as Canada posted the first trade surplus in five months and the third in more two years.
Arlene Kish of IHS Economics says the weaker loonie is encouraging the export sector, as well as manufacturers.
With the U.S. economy starting to finally come out of the doldrums, economists are now counting down the months to when Poloz, and his counterpart in the U.S., will actually have to start hiking interest rates, rather than just talk about the prospects.
The consensus is that the moment is still about a year, or even 18 months, away.
Still, Porter says even that far into the horizon, the detritus from the crippling 2008-09 crisis on financial markets will still be felt.
“Even when rates do finally begin to rise and move back toward ‘normal,’ we are likely to find that normal is lower than it was prior to the financial crisis,” he wrote in a brief to clients recently. “Prior to 2007, the conventional view on the neutral overnight rate in Canada and the U.S. was generally between 4.0 and 4.5 per cent. We suspect that neutral in Canada may now be below 3.5 per cent, and around 3.75 per cent for (the U.S.).”
Poloz will also release on Wednesday the bank’s spring monetary policy report on the state of the Canadian and global economies.