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Should Bank of Canada's Poloz cut rates today or ‘wait to see the whites of the eyes’? Add to ...

Markets await Poloz

You can get a sense of just how divided the Bank of Canada might be from the musings of the many observers who think Governor Stephen Poloz and his colleagues will, won’t, should or shouldn’t cut their key rate this morning.

The central bank releases its decision and accompanying monetary policy report today amid tremendous turmoil in the oil and currency markets.

Oil prices have been on a relentless decline and the Canadian dollar in a tailspin that has put it below 69 cents U.S., with warnings of further depreciation to come.

Today, the loonie touched as low as 68.08 cents U.S. and as high as 68.72 amid renewed turmoil in oil and stocks.

The Bank of Canada has trimmed its overnight rate twice in the past year amid the collapse in crude prices and some observers expect another cut today of one-quarter of a percentage point, which would bring the benchmark down to just 0.25 per cent.

Given the rout in the oil market, the central bank is also expected to cut its forecasts for the Canadian economy, which contracted in the first half of last year and then rebounded in the third quarter.

The fourth quarter, though, was weak and economists believe it stalled or possibly even contracted again by up to about 0.5 per cent.

“The Bank of Canada kicks off its 2016 meeting schedule with a tough decision,” RBC Dominion Securities strategists Mark Chandler and Simon Deeley said in a lookahead to today’s decision.

“Unequivocally, growth disappointed to end 2015 and market turmoil to start 2016 looks daunting.”

Here are three views:

The ‘yes’ camp

“We expect the BoC to ease at their policy meeting ... with 2016 GDP set to be cut to around 1.5 per cent from 2 per cent previously. ... Monetary policy operates with lags. So why should the BoC wait to see the whites of the eyes of recession before easing? By then, it may be too late. Economists have increasingly called for more federal infrastructure spending, but it may only be late 2016 before the impact begins to kick in. That leaves several months for the economy to slide into further weakness and for inflation expectations to drift lower.”

Emanuella Enenajor, Merrill Lynch

The ‘no’ camp

“Canada is going through needed adjustments following a terms of trade lift to domestic incomes that was then leveraged to record heights in the household sector. Coming off such influences involves simply working through such imbalances. Cutting rates risks further inflaming sectors already in a state of imbalance, notably housing, while doing little for the rest of the economy. ... Adapting to a new reality within the limits of policy – fiscal, monetary and regulatory – may be the order of the day. Modest fiscal stimulus is in the works. That could give the BoC some confidence that it can pass the baton to the federal government.”

Derek Holt and Dov Zigler, Bank of Nova Scotia

The ‘patience’ camp

“We are unconvinced by some of the arguments put forward against a rate cut under the current circumstances. ... However, there are arguments in favour of near-term patience. Part of the rationale is tied to market volatility to start the year, making it unclear the likely influence of broader financial conditions. More fundamentally, this is a crucial period for firming up capital spending plans that could dominate first-half growth as in 2015. A couple months of trade/manufacturing data may provide more clarity on the ‘serial disappointment’ from these sectors and, within the next month or so, we’ll have a much clearer idea on the federal fiscal impact post-budget.”

RBC’s Mr. Chandler and Mr. Deely

A scene we might one day see in Toronto ...

Photo illustration

Quote of the day

“Hope is a poor investment strategy.”
Brenda Kelly, London Capital Group

Markets tumble

Global markets are melting down fast this morning, putting some into official bear territory.

Oil slumped again, and the Canadian dollar sank close to the 68-cent U.S. mark.

“It’s not a pretty sight, with every single sector in the red this morning, only serving to prove that yesterday’s bounce was a short-lived relief rally based on very little but hopes for more Chinese stimulus,” said Ms. Kelly, London Capital Group’s head analyst.

“Any traders who established new long positions yesterday are quickly learning that hope is a poor investment strategy.”

Tokyo’s Nikkei plunged 3.7 per cent, Hong Kong’s Hang Seng 3.8 per cent, and the Shanghai composite 1 per cent.

In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were down by between 2.7 per cent and 3.3 per cent by about 8:15 a.m. ET.

New York futures were also down.

“Since the beginning of this year, equity markets have not only spun their wheels, they have lost any semblance of positive traction as continued concerns of oversupply in the oil and gas market set against a backdrop of slowing global growth has seen stock markets across the globe slip back into bear market territory,” said chief analyst Michael Hewson of CMC Markets.

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