Stock markets rose and the dollar fell. But one clear winner from the Bank of Canada's rate cut was Stephen Harper.
After spending so much time warning that high household debt made the financial system vulnerable, Bank of Canada Governor Stephen Poloz changed gears pretty sharply on Wednesday to make borrowing cheaper. Lower oil prices threaten to slow the economy in the near term, so the central bank cut interest rates to stimulate it.
That shocked financial markets. But Mr. Harper must be smiling and thinking he picked the right man to lead the bank.
There have been some moments of shock inside the Conservative government, too. The Tories have realized the economy could turn ugly, quickly, and had to scramble. Finance Minister Joe Oliver last week delayed the federal budget until April. His colleague, Jason Kenney, suggested on the weekend that Ottawa might cut spending, but another government figure, speaking under cover of anonymity, told reporters Mr. Kenney was mistaken.
They are worrying. It is an election year.
A little economic insecurity is usually good for the Conservatives, because voters tend to see them as safer economic managers than their rival parties. But a lot of insecurity, especially when it comes with layoff notices, is an uncontrollable risk to a sitting government. And it is not easy to counter it when balancing the budget is politically crucial.
Enter Mr. Poloz, whose rate cut will help cushion the blow.
Mortgage rates will go down. So will the Canadian dollar, which helps exporters sell more. Consumers should get a double break from lower gas prices and smaller interest charges. Companies, encouraged by the low cost of borrowing, might be more inclined to expand, or at any rate, cut back less. The monthly job statistics are less likely to be disastrous.
This silver lining comes with a cloud – the bank's warning that lower oil prices will be "unambiguously negative" for Canada, especially in the short term. But the central bank also acted quickly, and with no cost to Mr. Harper's budget balance.
The Bank of Canada is an independent body that operates at arm's-length from the government, so Mr. Harper can count himself lucky that it decided easing the short-term effects of low oil prices on the economy was an immediate priority.
Mr. Poloz was head of Export Development Canada, the government's export-finance agency, when then-finance minister Jim Flaherty named him as the surprise choice to head the Bank of Canada almost two years ago. Some said the Conservative government liked his real-economy experience outside the central bank. Perhaps that background led him to react quickly to potential slowdown.
But it certainly surprised. Deputy Bank of Canada governor Timothy Lane had warned in a Jan. 13 speech that lower oil prices will be "bad for Canada." But most analysts saw that as only a shift in tone, and still expected the central bank to stand pat on rates.
"Nobody would have blinked if the Bank of Canada had done nothing," C.D. Howe Institute vice-president Finn Poschmann said.
After all, Mr. Poloz and the bank had warned about debt levels, and that all the borrowing would make the economy vulnerable to a shock.
A December release from the Bank of Canada warned that household debt-loads were the biggest risk to financial stability in Canada. It suggested that low mortgage rates were in part responsible for an inflated housing market – raising the risk of a crash.
Now the Bank of Canada is reducing its rates, and that encourages more borrowing. Few economists, Mr. Poschmann noted, think Canada needs lower mortgage rates. And it is a surprise that the bank felt such an urgent need to counter the short-term effects of lower oil prices on the economy.
Even as he cut rates to counter the oil-price effect, Mr. Poloz predicted other factors, like increased exports aided by a low dollar and a strong U.S. economy, will boost growth later in 2015 – just not quickly enough. The bank decided the best way to protect against instability was to cut rates now to stimulate incomes and growth, he said.
The Prime Minister surely will appreciate the timing. Mr. Harper has an Oct. 19 date with voters. Waiting through a sharp slowdown for the economy to bounce back at the end of the year probably does not fit his calendar. He will be happy Mr. Poloz stepped in.
Campbell Clark