Stephen Poloz wasn't eager to turn the Bank of Canada's position on interest rates into a political football. The economy's timely upturn allowed the bank's governor to deftly avoid getting his monetary policy entwined in a heated election campaign.
In Wednesday's regularly scheduled rate decision – the only one landing during the lengthy campaign – the Bank of Canada held its key interest rate steady at 0.50 per cent. That came on the heels of a quarter-percentage-point rate cut at the bank's previous setting in mid-July – a cut that had prompted considerable speculation that a subsequent cut was in the cards. But just as he did after his surprise quarter-point cut in January, Mr. Poloz again demonstrated a preference to step back and assess his handiwork.
"The stimulative effects of previous monetary policy actions are working their way through the Canadian economy," the bank said in its brief (five-paragraph) rate statement.
The statement observed, rightly, that many of the key economic factors on which the central bank bases its rate policy have followed the script the bank laid out in July. Yes, the gross-domestic-product figures released this month confirmed that the economy had contracted for a second consecutive quarter – a revelation that fired up the political rhetoric amid charges that the economy had slipped into another recession. But the rate of decline in the quarter, 0.5 per cent annualized, was precisely what the central bank had estimated in its July economic outlook. Inflation has continued to edge higher, but remains tame. The bank said that "risks to financial stability" – primarily, the household-debt situation – have also evolved as expected after the July rate cut.
With these key aspects to rate policy playing out as the bank thought they would when it last cut rates, it suggests that the bank's policy is working as planned. Thus, no need to change, the bank is essentially saying. For the time being, anyway.
That "time being" just happens to be for the remainder of an election campaign that has become increasingly about the economy. The Bank of Canada's next rate decision is scheduled for Oct. 21 – two days after the election. A non-move in the September decision, accompanied by the steady-as-she-goes statement, keeps the central bank from passing judgment on the economy until after the vote.
Does this matter to Mr. Poloz? Certainly. Bank of Canada governors are, by definition, supposed to be insulated from the political fray; Mr. Poloz, by his own personal nature, prefers to be more insulated than some of his predecessors. (Unlike the two governors immediately before him, Mark Carney and David Dodge, both of whom had stints as senior officials in the Finance Department, Mr. Poloz has never worked in the government.) He has a knee-jerk distaste for even the slightest appearance that the bank's decisions are influenced, or motivated, by political concerns. The last thing this governor would want is to influence an election campaign, even inadvertently, by making a bold policy move in the midst of it – or, perhaps worse still, to give any appearance that the campaign had influenced central bank policy. (Indeed, Mr. Poloz's resolve in this regard might have been strengthened last month when Prime Minister Stephen Harper's office, in a bit of electioneering at the height of the China-fuelled financial market turmoil, issued an unusual statement that the PM had been in touch with the governor to discuss the matter.)
By the same token, though, Mr. Poloz wouldn't duck or delay a rate cut that he felt was necessary, simply out of concern for political optics. Fortuitously, since the quarter-point cut in mid-July, Canada's fragile economy has evolved mostly for the better – making a convincing case to shift into neutral on interest rates regardless of the timing or political implications.
After five consecutive months of contraction, Canada's GDP grew an encouraging 0.5 per cent in June from May. The country's trade deficit has narrowed dramatically over June and July, as the two months combined for an 8-per-cent surge in exports. Employment has continued its modest growth. After slumping amid China fears in August, commodity prices have stabilized and recovered somewhat this month.
That's not to say that another cut might not still be in the cards before the year is out. It's still a possibility, especially given the ongoing uncertainty surrounding depressed oil prices, which took another big step backward last month and haven't fully recovered. As the central bank said in its rate-decision statement, the Canadian economy's adjustments to the oil shock "are complex and are expected to take considerable time." In other words, we're not out of the woods yet.
But the improved health of the economy over the summer, made-in-China market volatility notwithstanding, suggests that if anything, the risk to the central bank's economic outlook is now to the upside. How long it lasts and how strong that upside will be, as the bank's stimulative rate cuts and the positive effects of a low Canadian dollar on exports continue to play out, is something we don't know. But the fact that this upside has emerged buys the Bank of Canada more time to watch things evolve – at least until the political heat has died down, if not longer.