Kevin Carmichael's Observer: What Stephen Poloz’s latest rate cut tells us about Canada’s central bank chief
Reputations were restored on Toronto’s Bay Street last week.
Forecasters at institutions such as Royal Bank of Canada and Canadian Imperial Bank of Commerce — who were embarrassed by the Bank of Canada’s shock interest rate cut in January — correctly predicted that deteriorating economic data would prompt Stephen Poloz to reduce Canada’s benchmark rate for a second time in 2015. The target rate for overnight loans between banks now is 0.5 per cent — a quarter point above what the central bank says is its effective lower bound.
The decision appeared as if it could have gone either way.
Surveys of analysts and market pricing suggested expectations were split. When asked whether it was a close call, Poloz said that it wasn’t — but the process of achieving consensus certainly appeared to be more agonizing than usual. “We had a number of trade-offs on the table,” he said at a press conference after the announcement. “Let’s say it’s sufficiently complex it requires a lot of deliberation and a lot of inputs. It’s not a mechanical decision. Not even close.”
On the eve of the announcement, I wrote that the case to leave the benchmark rate unchanged was at least as good as any argument to cut. (If I worked on Bay Street, my clients would have lost money.) I thought the Bank of Canada would decide to save its dwindling stock of gunpowder for another day. But I correctly assumed that the decision would come down to a judgement call, and that we would therefore learn something about Canada’s still relatively unknown central bank governor.
So what did we learn? A few things.