The Bank of Canada’s new policy statement is barely 400 words in length. This review of the March 9 decision will struggle to match that wordcount, as there isn’t much to say.
Policy makers stated explicitly that they await the March 22 federal budget. They will then add Finance Minister Bill Morneau’s spending intentions to a new economic outlook set for release in April. However, it’s unlikely that Governor Stephen Poloz is oblivious to what Morneau has in mind. They speak regularly and Poloz has said the central bank and Finance are working together on getting their models calibrated correctly. If Poloz had reason to worry that the fiscal authority was getting cold feet about doing something positive for economic growth, he would have cut borrowing costs in January. He balked, and the case for cutting the benchmark rate only has weakened since.
Notable in the latest statement was the Bank of Canada’s assessment that financial markets were calming and that the central bank still thinks the global economy will strengthen this year and next. These were important risks only a few years ago that now apparently are abating. That takes pressure off the central bank to cut interest rates, an important development as policy makers reiterated that “financial vulnerabilities continue to edge higher.” That’s a reference to Canadian households’ heavy debt burden, and lower borrowing costs only would encourage more borrowing.
The Bank of Canada is not among the nervous nellies fretting about the 8% increase in the value of the Canadian dollar against the U.S. currency since late January. The statement attributed the gain to higher commodity prices and shifting expectations of when the U.S. Federal Reserve will next raise its benchmark interest rate. It’s funny how chatter about the currency goes: not so long ago, the headline worry was that the Canadian dollar was at risk of testing its all-time lows. Poloz didn’t panic then, and he won’t panic now. “Non-energy exports are gathering momentum, particularly in sectors that are sensitive to exchange rate movements,” the statement said. Exporters appear to be competitive with a 75-cent dollar.
Things could go wrong. The central bank acknowledged that there are “downside risks” attached to its relatively positive outlook for global economic growth. Oil prices are higher, but not high enough to inspire new investment in the oil patch, where retrenchment has lead to “very weak” overall business investment, the Bank of Canada said. Household is driving domestic demand, but there are good reasons to be skeptical about the extent to which that will continue. Inflation is under control. These all are reasons to leave policy unchanged, which the Bank of Canada appears set to do for at least the rest of the year.
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