As I predicted in my previous posting, the Bank of Canada today cut its benchmark rate by 25 basis points, to a new all-time low of 0.50 percent. Bank Governor Stephen Poloz has been all over the map with his economic outlook this year. Back in January, when the Bank last cut rates, it was "atrocious"; by the end of the first quarter, Poloz was seeing positive signs, and predicting that the worst impact of the fall in global energy prices was already behind us. Now the Bank has fallen in with those private sector forecasters who have been suggesting that the economy is back into a mild recession, and that recovery in the second half of the year will be slow.
It's getting a bit wearisome (even for me as the writer, so I assume it's the same for you as the reader!) to keep reiterating why easier monetary policy is almost certainly not the magic bullet for the Canadian economy at this time. A weak exchange rate, half a decade of record low interest rates and a US economy powering ahead have done next to nothing to boost Canada's non-oil exports, and it would be groundless optimism to think that this latest piece of tinkering will make any difference. In fact, by sounding so gloomy. the Bank may undermine confidence and actually make the situation worse.
Meanwhile, there were warnings even before today's move that further monetary easing could generate a full-fledged bubble in the housing market, always assuming that there isn't one already. Interestingly, only one bank has so far cut its lending rate in response to the Bank of Canada's move: my old employer, TD, which has cut rates by only 10 basis points, not the full 25 that would match the cut in official rates. If the other major banks follow suit, as is likely, they will no doubt be accused of profiteering. Maybe so, but it's at least as likely that they're trying to prepare themselves for the carnage that they must fear is coming if the Bank of Canada doesn't wise up.
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