Stephen Poloz says rate cut remains on table — Canada’s high-flying loonie goes into a swoon
Bank of Canada Governor Stephen Poloz highlighted unknowns around U.S. President-elect Donald Trump’s policies in a rate decision and indicated he’s prepared to cut interest rates if new protectionist measures derail the nation’s economy.
And the loonie’s charge higher is worrying policy makers at the Bank of Canada which held interest rates today. Read on
The central bank kept its key interest rate unchanged at 0.5 per cent and said “significant uncertainties” from the U.S. are weighing on the economic outlook. These include a shift toward protectionist global trade policies. At a press conference following the announcement, Poloz said he’s prepared to cut rates if needed.
“Should any of those downside risks materialize and put our inflation target at risk then we would have the room to manoeuvre,” Poloz said in response to a question on whether the Governing Council discussed the possibility of a cut during their interest rate deliberations this week. “Yes, a rate cut remains on the table and it would remain on the table as long as those downside risks were still present.”
Canada’s currency responded to Poloz’s comments, falling as much as 1.2 per cent to C$1.3201 against its U.S. counterpart at 12:20 p.m. in Ottawa. The yield on government two year bonds fell 3 basis points.
Wednesday’s monetary policy report is the first since Trump won U.S. elections.
“Uncertainty about the global outlook is undiminished, particularly with respect to policies in the United States,” policy makers said in their rate decision from Ottawa. The bank “will continue to assess the impact of ongoing developments, mindful of the significant uncertainties weighing on the outlook.”
Even with evidence Canada is finally beginning to recover from two years of oil-shock pain, Poloz noted several negatives in his rate decision and press conference. In addition to the unknowns, the central bank noted “material excess capacity” in the economy in contrast to the U.S., an ongoing hit to incomes from the oil shock, slowing residential investment and a labour market that has deteriorated.
One theme in the comments from the central bank is that Canada’s economic situation is different from the U.S. The drag of a higher Canadian dollar — off to its best annual start since it became a floating currency in 1970 — was mentioned both in the rate announcement and opening statement to the press conference.
Higher Canadian bond yields, driven by rising U.S. yields, are also inconsistent with the country’s economic outlook, Poloz said.