Bank of Canada governor Stephen Poloz held rates unchanged in what appears to be an effort to calm both currency markets and nervous Canadians.
The Canadian dollar jumped 0.8 of a cent in the minutes after the announcement, and there's no doubt this was part of Mr. Poloz's plan. The loonie had dropped 5 per cent in the first three weeks of 2016 - a remarkably short period of time that provided little chance for domestic consumers or businesses to adjust to the change. Furthermore, a cut in interest rates would have caused further declines in the Canadian dollar, with the risk of a subsequent rout that could have become severe as selling in currency markets gained more momentum downwards.
The Bank's Monetary Policy Report accompanying its decision noted that economic growth had "stalled" in Canada during the fourth quarter – Canadians can expect growth domestic product growth at zero or below for the period - and a "softening" of U.S. economic growth.
Despite the North American slowdown at the end of 2015, the forecast for 2016 Canadian economic growth remains, while reduced, shockingly positive:
"Tthe Bank now expects the economy's return to above-potential growth to be delayed until the second quarter of 2016. The protracted process of reorientation towards non-resource activity is underway, helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions."
Bank of Montreal economist Douglas Porter's reaction to the forecast was published immediately after the announcement:
"Unfortunately, we suspect that they are still a bit too optimistic on the growth outlook, given the relentless drop in commodity prices and a darkening global backdrop. Accordingly, we continue to believe that they will eventually trim rates further, revisiting the record low of 0.25% on the overnight rate. The most likely time for a move would be at the April 13th meeting."
Mr. Porter would not be predicting an April reduction in central bank rates if he believed the domestic economy would "return to above potential growth" in the near term.
Much depends on U.S. demand for Canadian exports. The Bank noted that during the fourth quarter of 2015 "weaker-than-expected U.S. industrial production likely weighed on Canadian exports [but] many subcategories of non-energy-commodity and non-commodity goods exports— such as potash, seafood products, and ships, locomotives and rapid transit equipment—showed sizable gains during 2015."
Despite the weak loonie, however, domestic factory activity is showing few signs of recovery. National Bank senior economist Matthieu Arseneau, writes that while November factory data was stronger than expected, " it was the first increase in 4 months and sales remains down 3.1% since the start of 2015. … Despite November's rebound in volume sales, the previous month's weakness means that manufacturing is so far a drag on economic growth in Q4."
Through no fault of his own, Mr. Poloz's attempt to calm the waters was poorly timed – the 2016's sharpest sell-off in global markets made success unlikely. In the next few weeks we will see if the efforts to focus on the positive bear fruit.