Bank of Canada rate cut
Seeing more downside to the Canadian economy compared to worries about inflation, the Bank of Canada lowered overnight interest rates today by a quarter-point. The Bank has apparently been reading the PEF blog, as we have been calling for a rate cut for more than two months. (This is also personally reassuring as I decided to go with the variable rate mortgage and will see my rate drop by the same quarter-point.)
Here’s the Bank’s carefully worded press release:
Bank of Canada lowers overnight rate target by 1/4 percentage point to 4 1/4 per cent
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 4 1/4 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 4 1/2 per cent.
Since the October Monetary Policy Report (MPR), there have been a number of economic and financial developments that have a bearing on the prospects for output and inflation in Canada.
Consistent with the outlook in the MPR, the global economic expansion has remained robust and commodity prices have continued to be strong. The Canadian economy has been growing broadly in line with the Bank’s expectations, reflecting in large part underlying strength in domestic demand. However, both total CPI inflation and core inflation in October, at 2.4 per cent and 1.8 per cent respectively, were below the Bank’s expectations, reflecting increased competitive pressures related to the level of the Canadian dollar. The Bank now expects inflation over the next several months to be lower than was projected in the MPR. In the context of exceptional volatility in global financial markets, the Canadian dollar spiked well above parity with the U.S. dollar in November, but it has recently traded closer to the 98-cent-U.S. level assumed in the October MPR.
Overall, the Canadian economy continues to operate above its production capacity. Given the strength of domestic demand and weak productivity growth, there continue to be upside risks to the Bank’s inflation projection.
However, other developments since October suggest that the downside risks to the Bank’s inflation projection have increased. Global financial market difficulties related to the valuation of structured products and anticipated losses on U.S. sub-prime mortgages have worsened since mid-October, and are expected to persist for a longer period of time. In these circumstances, bank funding costs have increased globally and in Canada, and credit conditions have tightened further. There is an increased risk to the prospects for demand for Canadian exports as the outlook for the U.S. economy, and in particular the U.S. housing sector, has weakened.
All these factors considered, the Bank judges that there has been a shift to the downside in the balance of risks around its October projection for inflation through 2009. In light of this shift, the Bank has decided to lower the target for the overnight rate. At its next interest rate decision in January, the Bank will assess all economic and financial developments and the balance of risks. A full projection for the economy and inflation will be published in the Monetary Policy Report Update on 24 January 2008.
Two questions
What about the role a low dollar may played in allowing manufactures to skimp on capital investment?
And to what extent will a .25 cut make much of a difference with the Fed set to move by maybe .5?
I think Mr. Fast’s first point is an interesting discussion item that needs to be addressed. At some level a high dollar does allow producers to save on capital investment on imported tech and machinery or whatever other innovations can be gleaned from the outside value adding production processes of the world. However, we do need to have some glimmer of hope that a profit will be shown in some not so distant turbulent future. This to lubricate the savings vs investment decisions that must be made within the current economic framework by these profit maximizing companies.
However it would an easy out to suggest a dollar at parity makes this an unrealistic expectation. But hold on a minute. Is it that our economy can and should be able to not only survive but thrive at dollar parity as some are starting to suggest within the neo-con camps. Why can’t we compete at parity, why is it that labour and manufacturers (strange bed partners) have been calling on the bank to lower rates to bring the dollar down. Have we all grown soft and uncompetitive, and must hide behind a devalued dollar, as some are suggesting.
On the surface it seems to be an important and legitimate question. However, given the premise that the Canadian economy had made the adjustment to a below 80 cent dollar for almost 2 decades suggests that given the volatility in the Canadian dollar and its dramatic rise in the last year, makes the inferences of such questions highly, uh, questionable.
We are talking about dynamics here that are slow moving adjustments. The valuation of the dollar is effected by many dimensions and having flip around like a fish out of water, is uh, like a fish about to die. And that is precisely what is about to happen to the Canadian manufacturing industry and the the forestry industry. In the CEP’s call for a summit on the state of the forestry industry, some blame was affixed to lack of investment and older technology in some mills. THese potentially are the effect of having a low dollar and hiding behind it. But to suggest that within a years time a company within a sector can respond to the signals of the market that has its dollar overtaken by “Dutch disease” is quite an improbable space to start to remedy solutions from. For those within the finance committees on the hill and cowering under Flaherty, they should be ashamed of themselves to suggest that the high dollar allows companies these wonderful lower cost opportunities for investment. (that is if you can get an American supplier to take our dollar at the going rate)
It is an embarrassment and a total lack of perspective for elected officials to keep making these claims, and especially at the Ministerial level. (where is this Harper ship heading?)
If the time frames were 10-15 years then I would say Mr. Fast’s point would be well taken. But to expect investment and a solution to fall into place within the survival space time lines of some of the most important industries within the Canadian economy is a fantasy.
One needs to look no further than our auto industry. It is about to all come apart at the seams. One, at least me anyway, does have to feel for the CAW these days. Not only are they facing a major crisis within their bread and butter industry, they are being totally ripped by their own kind for trying to be innovative and hold onto something before the apocalypse occurs. They have made concessions there is no doubt, and given the state of the industry for other employers to seek out these as trend setting or pattern bargaining as some suggest would and should be labeled ludicrous. Dumping millions of dollars into another organizing campaign that would with respect to historical orhganizing of Magna would never give them over 50% of the auto parts industry in Canada, is a bit late in the game right now. Having an open invitation to organize 18,000 workers is an offer that is just too hard to pass up. At what cost though, is what the rest of the armchair crowd has been yelling.
A no strike clause, I will say seems like a lot to give up. But hold on, is it really. I mean that industry is so integrated, that the CAW by having over 50% of the auto parts sector (assuming they get it) could very easily indirectly strike MAgna through one of the big three. It is all pattern setting within that IR system and by having Magna turns the dynamics of that industry right into the pattern (unlike what is happening in the US under Delphi and the anti-union whipsawing in the non-union autp parts sector). And really who in the auto industry could with stand a strike now or within the foreseeable future anyway. With binding arbitration, you may be better off.
There is one thing that is clear. THe IR system in Canada just withstood another major quake, and the fault between the private sector and the public sector house of labour has widened. I for one am amazed at how fast the labour movement moves in for the kill and eats it’s own.
Okay sorry I got side tracked somewhat but there is a lesson in the CAW Magna deal and this all gets back to the point that change is upon us, and given the integration we have with our neighbour south of the border, we cannot and should never discount this historical, slow moving relationship that we have with our largest economic trading partner.
I for one have been to just one too many plant closings and I would love to see the finance Minister or the BOC officials visit a few of these now closed shops.
Bring the rate down, we need at least a half point in January.
Paul
It’s my belief and that the U.S. is on a slide towards a fiscal crisis, at the very least they will devaluate the dollar and cause inflation in order to lessen the real value of their debts, and destroy the real value of the 47 trillion of unfunded liabilities. The scale of the devaluation needed to manage the 56 Trillion they owe will be massive.
Can the BoC justify keeping up with U.S. rate cuts, destroying the buying power of the Canadian dollar and inflate away our savings for the sake of jobs?
My bet is the U.S. will see 2% rates by late 08, anything including massive inflation (which they can lie about) rather than suffer a recession pre election.
How far down should we be willing to go to match the U.S. dollar devaluations?
Is not the primary role of the BoC to provide sound currency , not manage jobs? The Gov through incentives and tax decreases can pump the economy but the BoC has a more sacred role to defend our Currency not our growth rate. Peak oil and global warming should be a sign that endless growth cannot be infinite.
Not only that but these rate decisions are made on false data, no one in their right mind believes the CPI figures. Real Canadian Inflation is north of 5%, monetary growth more than 8%, to claim 2% inflation is a bald faced lie.