Beyond the Lower Bound
The Bank of Canada seems to have at least left the door open to taking unorthodox measures to take some of the steam out of soaring loonie.
Today’s interest rate announcement – http://www.bankofcanada.ca/en/fixed-dates/2009/rate_201009.html – to be followed by a full Monetary Policy Report on Thursday – expresses concern that the strong Canadian dollar will hold back recovery… “The current strength in the dollar is expected, over time, to more than fully offset the favourable developments since July.”
Meanwhile inflation remains very low, below the target rate, and will remain very low…. “the Bank judges that, as a consequence of operating at the effective lower bound, the overall risks to its inflation projection are tilted slightly to the downside.”
So maybe the Bank should consider unorthodox measures to offset the impact of the higher dollar, and they do hint at that.. “In its conduct of monetary policy at low interest rates, the Bank retains considerable flexibility, consistent with the framework outlined in the April MPR.”
I guess those words- “considerable flexibility” must have been interpreted as a lot more than jaw-boning the dollar- as it went from .973 to .952 this morning- however oil did drop a couple of bucks this morning- gold however is up and the US$ hit a further low against the Euro.
But one would have to surmise the drop was due to the BoC words. We’ll see how long this lasts- and whether and real action is taken. I would think this time the BoC must do something concrete otherwise the traders will have a field day with this- our personal worth commodification evaluation hardware ( the canadian $).
I agree that the Bankâ€™s tougher talk on the dollar is welcome and that it seems to have helped knock off a couple of cents today.
However, the final reference to â€œthe framework outlined in the April MPRâ€ has been the closing line of every single interest-rate announcement since April. So far, it has not led to any action. It will be interesting to see what, if anything, the Bank unveils in Thursdayâ€™s MPR.
Forget the BOC. I think Erin is right they are not going to do more than Jaw Jaw. Perhaps it is time to float the idea of a combined portfolio investment inflow tax and a specific tax on all oil and gas investment inflows. Say 2% for each. That would put a combined 4% tax on all investment inflows into the gas and oil sector. It would cool off the oil and gas sector, put downward pressure on the dollar and help resolve regional macro-economic imbalances.
I suppose Alberta would cry, but who cares? They are not going to vote for anybody but the Cons anyway so any party that proposes it would have nothing to loose including the Cons.