The Bank of Canada conserved both ammunition and words Wednesday.
Governor Stephen Poloz and the rest of the Governing Council used 335 words to explain their decision to leave Canada’s benchmark rate at 0.5%. Laurentian Bank’s Sébastien Lavoie, a former Bank of Canada economist, said it was the shortest statement ever. Lavoie reckoned that was because there wasn’t much to say.
Poloz is known for his love of metaphors, yet the Bank of Canada’s forecasters are leaving him with little to explain these days. Gross domestic product contracted at an annual rate of 0.5% in the second quarter and 0.8% in the first, which is exactly what the Bank of Canada predicted in July when it dropped its policy rate by a quarter point. The economy remains weak, but no more than expected. “The stimulative effects of previous monetary actions are working their way through the Canadian economy,” the statement said.
After a tumult-filled start to the year, executives and investors should take a moment to enjoy a rare period of policy certainty. Down in New Zealand, the hair of the country’s central bank governor appears to have caught fire. Graeme Wheeler on Thursday cut the Reserve Bank of New Zealand’s benchmark rate by a quarter point to 2.75%, citing “elevated volatility” in financial markets and “renewed falls” in commodity prices. Wheeler’s statement also mentioned a “sharp decline” in exports, a “weakening” of consumer and business confidence, and that home prices in Auckland were “becoming more unstable.” And just in case traders missed the point, Wheeler said explicitly that the New Zealand dollar should be weaker and that another interest-rate cut was likely.
The New Zealand example shows that these remain strange days. It would be folly to look too far into the future of Canadian monetary policy, and the Bank of Canada offered no guidance on what it will do next. Still, it said some things about the present that were interesting. If anyone was waiting for lower interest rates to take a loan or purchase some derivatives, he or she probably should go ahead and do it now. The odds of another interest-rate cut this year are lower today than they were at the start of the week.
Poloz has been skeptical about the strength of the United States economy at various times during his tenure. No longer. The Governing Council characterized U.S. growth as “firm,” an impressive modifier in this era of “moderate” and “modest” economic expansion. That bodes well for exports. The Bank of Canada noted that U.S. demand was especially strong for the kinds of things that Canada ships abroad.
If Poloz has a dashboard of economic indicators, it would include a graph that looks something like this:
I have written previously about the Bank of Canada’s efforts to get a more granular understanding of trade. It thinks it knows the industries that are most sensitive to the level of the exchange rate. Each line on the graph represents monthly exports over 12 months, through July, of the five most important industries whose international shipments correlate strongly with the dollar. Poloz sees hope in that graph, as the statement said specifically that, “the latest data confirm that exchange-rate sensitive exports are regaining momentum.”
A weaker currency also is helping “absorb the impact of lower commodity prices” and “facilitating the adjustments taking place in Canada’s economy,” policy makers said. These are the words of people who think their policy is working. They are worried about the economies of China and other emerging markets and what that means for financial markets and commodity prices. Further turmoil could prompt a response from Canada’s central bank, as it could others.
But for now, the Bank of Canada is on hold. In fact, odds are that the next move will be an increase in borrowing rates. That will be in the distant future, however. The last important sentence from the policy statement Wednesday was this one: “These adjustments are complex and are expected to take considerable time.” The Governing Council was talking about the shock from the collapse in oil prices. The worst might be over, but the pain could drag on. Interest rates will stay ultra-low for as long as that pain lasts. How long might that be? As another central used to say, for a “considerable time.”
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