Was the rate cut the wrong move?

Was the rate cut the wrong move?

Was the rate cut the wrong move? The move is having a positive impact on broker business, but one analyst believes Stephen Poloz’s decision to cut the overnight rate in late January will negatively affect the economy.
“Up until January of this year, the Bank of Canada’s usual method of relaying monetary information was through a defined, transparent process that was familiar to the market,” Paul Gardner, a portfolio manager with Avenue Investment Management wrote in a guest column for the Globe and Mail. “The central bank had spent more than a decade nurturing this transparency, especially under Mark Carney’s tenure. This measured process was abandoned on Jan. 21 with a shocking rate cut.”
Gardner believes the move was unnecessary, pointing to a Canadian economy that is growing at around 2.25 per cent.
To say the move to cut the overnight rate to ¾ per cent came as a shock is an understatement.
According to a Bloomberg news article about the rate cut, none of the 22 economists who took a Bloomberg news survey predicted a rate cut.
And many industry players cried foul over the move.
“Part of the significance of the announcement by the Bank of Canada is not the rate announcement but the fact that they surprised the markets in doing it, which would lead us to believe that there could be further shocks to the system,” Calum Ross of Verico Calum Ross Mortgage told MortgageBrokerNews.ca following the announcement. “I don’t think further rate cuts are out of the question when they surprise us with this.
“It’s uncharacteristic for a central bank to surprise the market – the very basis of stability of a financial system is about maintaining the trust and not having surprises happen.”
Of course, the central bank held the overnight rate at its latest announcement, but could further surprise cuts be in the cards? Gardner hopes not.
“… the rate cut will only further fuel the overextended housing rally and private debt consumption,” Gardner wrote. “Over the past several years, the Bank of Canada has been obsessed with lowering consumer debt accumulation. The rate cut goes completely against this astute strategy and blatantly encourages more consumer debt.
  • Robby Mac 2015-03-13 12:42:07 PM
    Couldn't agree more! Lowering the rate and expanding the money supply in this over saturated market is just blowing air in the bubble!
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  • Doug King 2015-03-13 3:31:00 PM
    Many industry players cried foul over the move.
    Really? Why foul? Because your clients saved money? The Fab 5 'stole' 10 basis points off the top?
    Gardner, go back to sleep. People spend money because they want to, in ways they wish. Each spending decision has a consequence.
    Your sole responsibility is to provide for your client's financial well being as best you can once they contact you. Game over!
    As an afterthought, though, you sound like you believe your clients to be mindless, irresponsible spendthrifts. Encouraging point of view from a broker...
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  • Layth Matthews 2015-03-13 3:57:21 PM
    It is ridiculous to believe central bankers owe a duty to the market to be predictable and consistent all the time. Especially when there's a whole semester at central banker school devoted to courses like: "How to be a foxy git 101" and "How to bake a monetary surprise cake 102"!

    One of the main reasons central bankers preach nice predictable behavior is just so they will get some results if and when they do reverse themselves.

    Financial markets are lightning fast to adjust, so if you want bang for your buck, you have to surprise them, and I think the BOC got a lot of bang for just a .25% tap on the gas.

    It's way too early to tell whether this rate drop was over the top or too little too late. They say it takes 12-18 months before the effect of a monetary policy change is fully felt. Given that slow turn-a-round, and the potential labor displacement from the 50% drop in oil prices, it's also risky to cut just .25%, much less raise interest rates!

    I think one of the major policy obstacles is what you could call the transmigration of objectives, meaning, should policy makers manipulate the whole economy because homes look too pricey in certain markets? or should they be focused on stable employment? Personally, I prefer the latter and let the buyer beware in the home market. Otherwise, we could be torturing ourselves because foreigners like to buy homes here.

    Canada has had one of the most stable economies in the world so it is rational for home prices to be high especially given the long stretch of low rates of interest. What's scary is how little the economy has responded to such low rates. If we ever get to the boom phase of this business cycle, it is likely to be muted by demographic factors. So inflation is not as big a risk as it used to be.

    Alberta is holding up so well given the 50% oil price drop. Could it be that the soft Canadian Dollar has softened the blow and is creating manufacturing jobs back east? We can thank the easy monetary policy of the BOC for that too.

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