Are Central Bankers Losing The Plot: “The SNB Move Signals A Spectacular Loss Of Nerve”
As we have reiterated very frequently over recent years, the biggest vulnerability in the post crisis environment was that central banks start to make policy errors, by taking activist and precipitous decisions. Thus following on from last year’s error by Norges Bank (and noting that we would not call last week’s SNB decision a mistake, despite the shockwaves that it caused), the Bank of Canada joins that policy error club.
What does not compute, in an eerie mirror image of the Norwegian central bank’s rationale, is for the BoC to
- Slash headline CPI forecasts, while keeping core CPI forecasts around 2.0% (around target), and
- Tweak GDP forecast lower to 2.1% this year but upping the GDP forecast for 2016, and
- Still taking policy action
It signals a spectacular loss of nerve that central bankers should always try and eschew, above all when you have a country like Canada with the worst household debt levels in the developed world, and an overheated housing market.
The as expected cut in 2015 GDP forecast looks optimistic, when one considers that the energy sector accounts for 25% of business investment in GDP terms, and one might suggest that the GDP forecast should be closer to 1.0%, on the basis that there is likely to be a much broader fall-out from the energy sector “stall” (housing, transport, employment to name but a few).
As the evidence on this accumulates through the year, there appears to be considerable risk that the BoC’s forecasts look foolish – primarily in GDP terms, but quite possibly in CPI terms too, if the CAD starts a slide to USD 1.30 and the BoC’s disinflation problem evaporates. At which point memories of the very undistinguished period of Gordon Thiessen’s stewardship of the BoC may come back to haunt it.
But in broader terms, this is symptomatic of the whole mirage of stability that developed world central banks have sort to foster in the post crisis era starting to unravel in a rather disorderly fashion… the ECB’s task tomorrow looks ever more unenviable!
