More rate cuts?
Nouriel Roubini takes a dig at the Bank of Canada:
[Yesterday] the Bank of Canada started to get it by, unexpectedly, cutting its policy rate by 25bps; but 25bps is puny given the liquidity crunch in global markets that has also spread to the Canadian markets.Â 50bps or more was the minimum necessary to deal with a Loonie that is lunatically high and a massive financial contagion from the US to the Canadian financial markets.
Here’s a theory: this is all about perceptions and confidence, not whether a quarter-point cut is tinkering enough on the margins to change the general course of the Canadian economy. A few commentators on yesterday’s post seemed keen on a half-point cut and perhaps more in the months to come. I appreciate the underlying logic to those arguments, but a half-point cut â€“ when the markets were anticipating a quarter-point, and with things shaky down south but still ticking along reasonably well up here â€“ would have seemed like the Bank panicking and flip-flopping, and thus would risk freaking out the financial markets and other major economic actors.
In any event, the flow-through from the overnight rate to longer-term interest rates out there is far less than unity, and perhaps zero in areas where it might make a difference like consumer credit (my variable rate mortgage, notwithstanding). A more important reason is the high dollar, and if the spread widens between Canadian and US rates any more, it could turn today’s manufacturing hurt into serious chronic pain.
But a quarter-point was probably inevitable, given the dollar, the expectations in the markets and the high likelihood of the US cutting rates next week by at least a quarter point and perhaps a half point. I also think Dodge wants to leave room for action in the future, as it is smoother and better optics to steadily lower rates over time, and in so doing leaving some room for action by his successor as Governor.
Such “action” may rightfully be called pushing on a string should things get really out of hand. I’m all for a monetary easing but skeptical that rate cuts by central banks are going to be enough. Yes, Canadian monetary policy via interest rate cuts needs to keep pace with US rates to stabilize (or bring down somewhat) the Cdn dollar. But underlying this we are still holding onto the mythos of powerful central bankers at the helm, steadily adjusting course based on their measurements and understanding of the economic seas. Which comes back to the point about perceptions and confidence.
I’d like to see fiscal policy do more of the heavy lifting, and let’s face it, there is much work to be done on climate change, poverty, transportation, etc that necessitates the public spending as the vehicle for action.