Bank of Canada Governor Stephen Poloz is maintaining the central bank’s monetary policy wiggle room by holding its key “overnight rate” at 1.75 percent, where it has been for more than a year.
Poloz announced the decision on Wednesday, Oct. 30, amidst trade uncertainty, a minority government scenario unfolding in Ottawa and a day before homegrown petroleum giant EnCana fled Canada to establish a new headquarters in United States.
While Poloz could not have foreseen EnCana’s move, the Bank of Canada boss expressed concerns about the country’s resource fortunes.
“Energy-producing regions continue to struggle, as the full adjustment to the decline in oil prices back in 2015 is not yet complete, and transportation constraints are making the situation worse,” Poloz told reporters.
“It is painful for individuals, as it involves extended layoffs and possibly interprovincial migration, which is costly for all concerned.”
As the American economy continues to outperform our own, the Bank of Canada has little good news on this front and projects Gross Domestic Product growth for this year at approximately 1.5 percent, “below (Canada’s) potential”, creeping up slowly to 1.7 percent in 2020 and then to 1.8 percent in 2021.
As well, Bank of Canada economists say the Consumer Price Index – a basket price of goods that measures inflation – “likely will dip temporarily in 2020” as energy prices normalize and estimates inflation to ring in “close to the two percent target.”
But there is plenty of uncertainty ahead, Poloz noted, with respect to ongoing international trade disputes, a central theme of deliberations for the bank’s Governing Council over the past two years.
“Heightened uncertainty about future trade policies is directly reducing business investment, and there is a risk that this will spread to households as well,” said Poloz, noting that other central banks have eased their prime lending rates.
“However, we need to remember that tariffs and trade restrictions will work over time to permanently reduce potential output everywhere, while raising the prices of consumer goods… monetary policy can only do so much.”
Last July and for the first time in a decade, the U.S. Federal Reserve lowered its prime lending rate from 2.5 percent to 2.25 percent and on the same day Poloz held firm, his American counterpart dropped its rate again to between 1.5 and 1.75 percent.
Also cut down–to minority government status after the October 21st election–are the Liberals who have touted Canada’s low debt-to-GDP ratio (approximately 34 percent based on $768 billion in federal debt and $2.2 trillion in GDP), as rationale for their promise to book more deficit spending.
By comparison, America’s debt-to-GDP ratio is approximately 107 percent for a $20 trillion/year economy that’s on track to post 2.4 GDP growth for 2019.
Ian Lee, a business professor and faculty chair at Carleton’s Sprott School of Business, said that Canadian household debt–more than $2 trillion (the highest among G7 nations)–should also be top-of-mind for the federal government, as well as outstanding sub-sovereign accounts.
“Quoting just the federal debt is not the way that the OECD, the IMF or other international bodies quote debt. They quote all government debt, which in our case is federal, provincial and municipal,” said Lee. “And when you do that, we go from the best (position internationally) to the worst.”
Lee said if provinces don’t reign in their spending, some could risk insolvency, an inability to service the bonds. For example, in Newfoundland the government carries more than $13 billion worth of debt for a population of 521,000.
Add up all of the provincial debt with federal figures and not including municipalities or the three northern territories, Canadian governments are in the hole more than $1.5 trillion.
As for Poloz’s cautiousness in sticking with the status quo instead of following the U.S. Federal Reserve’s rate cutting lead, Lee said the Bank of Canada is positioning itself to act when required.
“I don’t think (Poloz) has any qualms about cutting rates. The moment he thinks it’s necessary, he’ll cut those rates so fast our heads will spin,” said Lee.
“There’s really only two things we can do if we go into recession. We lean on monetary policy to cut rates and the other is to stimulate, you print money, meaning you go into deficit spending.”