Bank of Canada Governor Stephen Poloz holds a news conference on Wednesday, Jan. 21, 2015, on the BoC’s decision to reduce the overnight rate.The Canadian Press
Don Coxe, a contributor to Globe Unlimited's Inside the Market, is chairman of Coxe Advisors LLP and is an adviser to several commodity funds.
We have heard complaints about the Bank of Canada's sudden 25-basis-point rate cut, mostly from Canadians planning winter vacations in Florida or Arizona.
Why, they grumble, add fuel to the real estate fire by reducing rates?
Why make imported goods more expensive for the poor?
Why encourage more speculation on Bay Street?
From my viewpoint, Stephen Poloz and his colleagues had little choice. They are trying to be virtuous, low-profile, long-term-oriented, non-political central bankers in a league of headline-seeking, high-profile, short-term-oriented, politicized central bankers.
Mark Carney broke the mould when he became the central banker du jour as a result of Canada's success during and after the crash. Mr. Poloz reverted to Dodge-Crow demeanour, dullness and caution — the play-book of respected central bankers dating back to Bagehot. But the global game had changed. Being the only central bankers who doesn't break the rules is hardly a winning formula when the Swiss National Bank can transform yields on Swiss bonds to negative through 2024: now that's doing something really neat for politicians and taxpayers.
In the same week as Mr. Poloz stepped briefly into global headlines, the European Central Bank made truly dramatic headlines, announcing gigantic balance sheet and policy changes. The failure of the industrial world to make a clean break from the Crash has meant near-zero cost money from central banks — including the Fed.
The Bank of Canada's 1 per cent rate risked making Canada a global banking Eiffel Tower in a community of ranch-style homes.
Mr. Poloz has problems some of those other central bankers don't face — and indeed are joys for them. Cheap oil has boosted the other G-7 economies but is hurting Alberta and Saskatchewan, which means really hurting the Canadian economy. Mr. Obama leads a nation where electricity costs are plunging and most state governments have been strengthening their balance sheets. Canada's biggest province has for years been ratcheting up electricity costs to win plaudits from Al Gore, and loading up its provincial debt at a rate that would horrify most American states. ( Bond analysts now suspect that the traditional common sense of Ontario evaporated within a year after voters rejected Mike Harris's self-described "Common Sense,"—financial discipline, albeit delivered in tough, brash terms.)
The Bank seems to believe that cheap oil is not a brief fad that will vanish with the death of King Abdullah. We share that view in spades: Iran's rush toward nuclear weapons is being slowed only slightly by Barack Obama — and is still being assisted by Vladimir Putin. The Gulf Arabs' only defense is to slash Tehran's (and ISIS's) cash flows.
So the Canadian economy suffers collateral damage from the renewed Sunni-Shia wars that have occurred intermittently for 14 centuries.
That probably means a recession in Alberta, which had been doing the heavy lifting for the entire Canadian economy (outside of downtown property developers in Toronto and Vancouver).
The bank's response to that drastic change in Canada's outlook makes good sense. Lower rates will ease the Mideast-spawned pain now facing Canada.
I attended a small Chicago meeting with Deputy Governor Tim Lane last week, before the bank announced its policy change. He was clear that cheap oil was a major threat to the Canadian economy. The mostly American attendees were truly impressed with his knowledge and common sense. One after another praised the Bank of Canada for its splendid record.
Canadians should be proud of having a remarkably unpoliticized, shrewd and self-effacing central bank that reflects Canadian values and priorities that are being challenged by global financial and geopolitical crises.
The Bank deserves support — not captious criticism.