For the Bank of Canada, Wednesday's interest-rate cut wasn't quite a case of "now or never." But it was starting to look a lot like "now or many months from now." Facing a choice of being potentially too early or too late, it made the safer choice.
On the surface, the decision by Governor Stephen Poloz and his colleagues on the central bank's Governing Council was by-the-numbers. The bank acknowledged that the Canadian economy likely suffered its second successive contraction in the second quarter. It slashed its 2015 growth forecast to 1 per cent from 1.9 per cent. It trimmed its estimate of underlying inflation slightly, to 1.5 to 1.7 per cent, pushing it a bit further away from the bank's 2-per-cent target. The slower growth and slower inflation means we're further away from the economy reaching full capacity and inflation returning to the target on a sustainable basis; the bank now thinks that won't happen until the first half of 2017, versus late 2016, previously. It all presents a solid case for a rate cut.
But did that cut need to be made now, or could it have waited until, say, the central bank's next rate decision in early September? There were some good arguments, all else being equal, for the central bank to have stalled for time in Wednesday's decision, to see if the economy delivers its anticipated improvement in the third quarter. It's notable that Mr. Poloz still sounds remarkably optimistic for a guy who just cut rates for the second time in six months. He stressed in Wednesday's post-announcement press conference that more than 80 per cent of the economy (the part outside of the struggling resource sectors) is growing at a respectable 2-per-cent annual pace. He characterized the expected economic recovery as only "slightly delayed."
But other considerations made it look like if the bank was going to cut rates, now was the only practical window to do so.
The July rate announcement is one of four a year that comes accompanied by a Monetary Policy Report – the central bank's detailed quarterly publication on the rationale behind its policy direction and its outlook for the economy, which typically runs 30-odd pages – and a press conference with Mr. Poloz. The September announcement is one of the four each year that comes with no MPR and no press conference – just a brief statement a few paragraphs long. Officially, the bank can change rates any time it wants; unofficially (although the bank would be loath to admit it), it's pretty clear that the preference is to make big moves like this with the full communications package to support its decision and explain its thinking to the markets.
But perhaps an even more pressing consideration was a political one. There's a federal election coming in the fall; a September rate cut would have landed smack-dab at the start of the campaign.
In theory, the central bank is blissfully free of political influence. But in practice, Mr. Poloz operates in the heart of Ottawa's political community, within spitting distance of Parliament Hill; he's surrounded by the politics of the nation's capital every day. He can't help but be sensitive to it, and aware that his decisions on monetary policy have political ramifications, especially as the election draws closer.
Mr. Poloz is not the type to be swayed by these politics; he's more likely to go out of his way to avoid any appearance of a political bent to his policy decisions. It's already a sensitive issue with him, as some observers have suggested more than once that the bank's stimulative rate policy has greased the wheels for the Harper government (which hired him, after all) to withdraw fiscal stimulus in its quest to balance the federal budget. (Indeed, in Wednesday's press conference, he was asked several times about fiscal stimulus, austerity and balanced budgets, and studiously refused to be led down that road.)
If he had waited until September, the election microscope would have been hard to avoid. Any decision he made – cut or no cut – would have been construed as a political statement, and parties on all sides would have used it as fodder. If he was going to keep the Bank of Canada out of the political debate, it was either make a cut now, or hold off until after the election in late October.
That would mean three months with fingers crossed, a long time to sit on your hands in a highly uncertain economy. Given the substantial lag for interest-rate changes to sway an economy – the central bank estimates it takes as long as two years for a rate move to have its full effect – waiting out the election might have left the bank perilously far behind the curve.
So what we got was a soft-pedalled rate cut, cushioned substantially by Mr. Poloz's relatively optimistic tone. He simultaneously cut rates while keeping the central bank's stance in neutral.
It's a delicate dance, and, some might argue, maybe even an inconsistent one. But it buys the bank time and gives it some cover until after the election, when it will again have a communications window to reassess. The mixed tone we're left with seems fitting for a rate cut whose timing was driven by prudence and practicality, if not by necessity.