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editorial

Bank of Canada Governor Stephen Poloz holds a news conference on the Bank of Canada's decision to reduce interest rates, Wednesday, Jan. 21, 2015.Adrian Wyld/The Canadian Press

It's possible to insure against all sorts of risks. Car accident. Fire. Flood. Disability. And if you're a central banker, the twin perils of economic slowdown and disinflation.

On Wednesday, Bank of Canada Governor Stephen Poloz surprised markets by announcing a quarter point cut to the Bank's benchmark interest rate, to 0.75 per cent. His explanation: "We decided that it was appropriate to take out some insurance." He's right. Depending on where oil prices and the economy go over the coming months, he may have to take out even more.

Mr. Poloz, who came into office as a surprise appointment after the departure of Mark Carney, has turned out to be perfectly suited for the times. He's been plain-spoken, sensible and non-ideological. And his decisions have been driven by the only thing that matters: evidence.

Ever since the recession, many critics have been clamouring for the BOC to hurry up and raise interest rates, foolishly wanting to slow a sluggish economy in order to fight some imagined inflationary threat. Mr. Poloz, in response, focused on economic facts. When the economy was picking up speed, he hinted that his foot might soon hover over the brakes. And now that the economy is clearly slowing, he's shifted to leaning ever so slightly on the accelerator.

Ever since the Great Recession of 2008, most of the world's central banks have been beset by a common problem: not enough growth. From Europe to the U.S. to Japan, economies are operating below full capacity – a technical way of saying that people who should be working aren't – and plant and equipment that should be producing are instead sitting idle. Because of that lack of demand, inflation in most of the developed world has been persistently low and stuck below target.

Over the past six years, Canada has been an outlier, the healthiest of the world's anemic major developed economies. The main explanation: oil.

Money flowing into the country from exports, high oil prices, growing production and jobs created thanks to tens of billions of dollars of investments in new oil-and gas-producing facilities all combined to give the Canadian economy a boost not experienced by the rest of the G8. Thanks in part to oil, Canada returned to pre-recession levels of employment years earlier than the U.S.

But what happens when oil prices collapse? An economic mainsail turns into an anchor.

"The drop in oil prices," said Mr. Poloz on Wednesday, "is unambiguously negative for the Canadian economy." The governor is known for speaking in clear, declarative English sentences. This was one of his best.

Cheap oil also comes with some upsides, as anyone who has filled up a car recently knows. The halving of oil prices since the summer has been like a giant tax cut for consumers around the world, and especially in the U.S., Canada's biggest export market. Americans and American businesses are likely to spend more, causing the American economy to strengthen, and increasing Canadian exports to the U.S. – eventually.

But as Mr. Poloz explained, these "offsets" to falling oil prices are "both partial and of uncertain timing." For example, even if newly flush American consumers do decide to spend more, it's unclear how much of that extra spending will be on Canadian goods and services, especially given how export industries centred in Quebec and Ontario have spent years cutting back in the face of a high currency and foreign competition.

The bottom line for Canada is, at least in the short term, a smaller than expected bottom line. Which is why Poloz and Co. took out that insurance policy.

The trouble with the future is that it's always unknowable. Who knew oil prices would collapse? And who can say for certain whether the U.S. economy will pick up quite as much speed as currently expected, or whether it will be knocked off course by, say, a renewed European crisis?

On Thursday, the European Central Bank is expected to unveil its own set of stimulus measures. Given the nature of the European problem, their move must be much bigger and more radical than Mr. Poloz's.

Canada is facing a slowdown in growth; Europe, in contrast, is facing recession and the possibility of deflation. Aside from being catastrophic for Europeans, a European economy in or near deflation would have serious knock-on effects for the global banking system and economy.

Mr. Poloz was right to take out his insurance policy. And depending on what happens to the U.S. economy, he may have to take out more. Six months ago, Canada's big economic stories of 2015 were expected be the timing of interest-rates hikes, and how to spend Ottawa's massive budget surpluses. Six months are a long time in politics. And central banking.