Posted on April 2, 2015

The Bards Of Bay Street Criticize Poloz

The claim is that surprising the markets causes volatility, which is inherently bad. Some suggest that the move exacerbated an already weakening economy by causing Canadians to fret that things are worse than they realized. Others accuse Governor Poloz of purposely targeting a weaker Canadian dollar, as though the currency would otherwise have ignored the oil price shock and ongoing evidence that layoffs are mounting, the Alberta economy is slowing rapidly and the housing market in Calgary has responded accordingly.

The lamentation over the loss of “forward guidance” is pathetic. Firstly, any Bank of Canada guidance is only as good as its forecast. Everyone knows that central bank action is data dependent. When the data surprise, all bets are off. Secondly, economists spill far too much ink ruminating about what the Bank will do. What caused this hissy fit on Bay Street was the economists were wrong. No one expected the rate cut, so caught with their proverbial pants down, the pundits dumped on Poloz for having misled them.

The Governor did the right thing. By early January, it was painfully evident that the economy was slowing  faster than expected in the wake of the 50 percent decline in oil prices. Not only are Alberta, Saskatchewan and Newfoundland affected, but countless businesses in the rest of Canada also suffer from the slowdown in energy production and reduced oil patch profits. As we saw in last week’s trade report, energy exports have plummeted, taking the trade balance into deep deficit. It didn’t help that on the same day as the trade release, the U.S. jobs report came in much stronger than expected causing the U.S.dollar and Treasury yields to surge as expectation of a Fed rate hike increased.

Bay Street accused the Governor of whiplash as the 80 percent of economists who thought another rate cut was imminent were signaled before the March 4 meeting that no such event would occur. All this ruckus boils down to the fact that BoC watchers were wrong and don’t like it.  I applaud the Governor’s move and see no reason why he needs to telegraph rate moves in advance.

The economy is on shaky ground as consumers are hoarding their gasoline price savings and non-energy exports and investments remain muted. The Fed will likely begin to raise rates later this year, which can’t be good for the loonie. Another rate cut in Canada is probable if the non-energy sectors do not kick in. Rate-sensitive spending has picked up with auto sales rising and housing activity in Toronto and Vancouver remaining strong. To be sure, this adds to household debt levels, but without this activity the economic slowdown would be substantially worse.

Things will settle down as oil prices stabilize, but in the meantime, the Bank will and should remain ever vigilant in providing support should the economy falter further.