Home / Business / Bank of Canada approaches uncharted territory today with Canada’s recovery in tatters

Bank of Canada approaches uncharted territory today with Canada’s recovery in tatters

Bank of Canada governor Stephen Poloz will release his interest rate decision today.

Stephen Poloz is in a no-win situation.

Bank of Canada warned rate cut will fan flames of loonie’s ‘unprecedented’ free fall

The Canadian dollar is falling too far and too fast, damaging public and business confidence in Canada, say economists. Read on

As the Bank of Canada governor prepares to release his interest rate decision, forecasters are about evenly split on whether he’ll cut the benchmark rate to 0.25 per cent or leave it at 0.5 per cent. A cut risks adding to an already epic currency slump and may do little for growth; standing pat gives the impression the central bank is cold to the widening damage from collapsing oil prices.

As if that wasn’t enough, extraordinary policy tools such as negative rates are now on the table for the first time in the central bank’s 80-year history. Poloz is approaching uncharted territory, and the stakes are high: there’s speculation the economy, which is still convalescing after two quarters of contraction in the first half of 2015, is at another tipping point.

“It’s not going to take a lot to shock the system and push us into a recession,” said John Johnston, chief strategist at investment manager Davis Rea Ltd. in Toronto. “The Bank of Canada will cut rates, it’s a no-brainer. If he doesn’t he will get crucified.”

Others say lower rates won’t accomplish much, and it’s time to let the economy adjust.

“Why would Poloz do another rate cut? To me that doesn’t make any sense,” Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel in Calgary, said in a Jan. 15 phone interview. “The dollar has already fallen below 70 U.S. cents so it should be doing its magic. Why do you need to lower rates?”

The loonie has depreciated 17 per cent against the U.S. dollar over 12 months, tracking the price of U.S. benchmark crude which has plunged to below $30 a barrel. Policy divergence — the Federal Reserve is raising interest rates, and odds are Poloz will cut at least once this year — is adding momentum to the currency’s decline. A rate reduction now would drop the Bank of Canada’s benchmark rate below the Fed’s for the first time since 2007.


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