Bank of Canada’s Stephen Poloz defends Bank’s credibility after rate cut shocker

OTTAWA — It has been a ground-shifting few months for the Bank of Canada.

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As the tumble in global oil prices continued to gather momentum late last year, central bank governor Stephen Poloz was already moving monetary policy away from a forward guidance stance on interest rate changes.

Then, on Jan. 21, he went even further: cutting the bank’s trendsetting lending level — at a time financial markets and almost all economists still expected rates to eventually rise — and calling it “insurance” for Canada’s energy sector.

On Thursday, the governor defended his recent decisions — himself raising the issue of “credibility” at the central bank.

“We knew that financial markets would be surprised by the move in January, and we generally prefer to avoid surprises. But we will do what is necessary to fulfill our inflation-targeting mandate,” Mr. Poloz told the Canada-United Kingdom Chamber of Commerce in London.

“Ultimately, our credibility will hinge on how well we meet our mandate over extended periods of time,” he said.

“Measured this way, it is clear to me that our credibility is intact,” he told the London audience.

Now, with crude prices and market volatility appearing to stabilize, Mr. Poloz is re-emphasizing the Bank of Canada’s core mandate of keeping inflation on target.

While the aim is to keep the annual rate of price increases as close as possible to 2% — the mid-way point between 1% and 3%, its not-too-hot, not-too-cold comfort range — words and actions have accounted for a great deal of the institution’s credibility over the years.

So, when Mr. Poloz and his policy team in January dropped the bank’s key rate to 0.75% from 1% — a level untouched since September 2010 — it came as a shock, leaving many wondering “what’s next?”

But Mr. Poloz on Thursday questioned whether “very low, long-term interest rates” and recent financial market volatility “represent an erosion of central bank credibility.”

“It probably won’t come as a surprise to you that I would say no. Central banks are doing their jobs in a very challenging setting.”

Among those recent challenges was the unforeseen collapse in global oil prices, an event that has thrown federal and provincial budgets, and energy-reliant industries, into a tale spin — hitting Alberta the hardest and Newfoundland and Saskatchewan to a lesser extent.

“The sharp drop in oil prices is having a significant effect, positive for some economies and negative for others,” Mr. Poloz said.
“This shock surprised everyone, and the fact that it is so large and happened so quickly means that many of us have had to work hard to fully grasp all the implications,” he said. “Central banks around the world, including the Bank of Canada, reacted to this environment with policy announcements that weren’t fully anticipated by investors.”

The Bank of Canada’s next rate decision will be on April 15, at the same time as policymakers issue their quarterly Monetary Policy Report [MPR] — an outlook on domestic and global economic trends and forecasts.

“I think in April, there’s probably a 25% chance of another cut. I think they’re not reading it yet,” said Charles St-Arnaud, an economist at Nomura Global Economics in London, who previously worked at the Bank of Canada.

“But things can change in three weeks,” said Mr. St-Arnaud, who attended Mr. Poloz’s luncheon speech.

“They may be tempted to until they get new GDP [figures] and run a new set of forecasts,” he said. “We could get new data. We could get a further decline in oil.”

Benjamin Reitzes, senior economist at BMO Capital Markets, agreed that “an April move is more or less off the table. [And] they’re unlikely to go in May because May isn’t an MPR month.”

“And then that leaves July. Before the July meeting we’ll start to get some second-quarter numbers,” he said. “If the second quarter is shaping up the same way [as a weak first quarter], that would probably change the equation for them a little bit — again depending on where oil prices are.”

Gordon Isfeld | March 26, 2015 |

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