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Stephen Poloz Considers Negative Interest Rates
Stephen Poloz Considers Negative Interest Rates
Price controls on interest rates are the latest fad.
A 100-year-trend that’s picked up steam in the last 15 years, where central banks have been confident enough to blatantly ignore the supply and demand for loans and keep rates as low as possible.
How low can you go?
For Bank of Canada Governor Stephen Poloz, it’s below zero.
In a four-page pamphlet, the BoC makes its case for negative interest rates because, “the nominal return for holding currency is negative, due to storage, transportation, insurance and other costs associated with securing and storing bank notes, particularly in large quantities. These costs make it possible for nominal interest rates to fall somewhat below zero.”
Poloz makes it sound inevitable.
In his worldview, interest rates are like playing with the shower faucet. Sometimes too much water is coming out, sometimes it’s not enough. Sometimes the water is too hot, sometimes it’s too cold.
It is the Bank of Canada’s job, so goes the thinking, to regulate this flow of water as to “promote the economic and financial well-being of Canada,” or even more hilarious, “to preserve the value of money by keeping inflation low and stable.”
That’s not what interest rates are for.
Interest rates coordinate production and consumption decisions over time. Some sectors are more sensitive to rates than others.
If interest rates rise, people won’t spend less in general. They will spend less on particular things, most likely real estate.
Low oil prices and a “weak” loonie (73 cents to the American dollar at the time of this writing) are not the fault of some mysterious force in capitalism.
It is the belief of central banks and governments that cutting rates is a fine way to get oneself out of an economic recession.
…click on the above link to read the rest of the article…
Central bankers must have the courage to act before a crisis: Don Pittis
Are our bankers-in-chief always condemned to crisis management?
Are central bankers always destined to be too late?
This weekend, two of that august fraternity were strutting their stuff. Former U.S. Fed chairman Ben Bernanke was busy promoting his new book called The Courage to Act. Meanwhile, Bank of Canada governor Stephen Poloz was giving speeches titled Integrating Financial Stability into Monetary Policy.
And in different ways, the two tread the same ground: how difficult it is to rein in a housing boom before it turns into a crisis.
The title of Bernanke’s book has already been pilloried for its hubris.
Voices had been raised for years that U.S. interest rates were too low and that it was driving house prices too high, distorting the economy. But as Bernanke admitted in an interview that played Tuesday on CBC Radio’s The Current, he didn’t act until it was far too late.
Greater than housing
“It wasn’t until August of 2007 that we began to appreciate that the ramifications of the losses on sub-prime mortgages were going to be much greater than just the housing market,” Bernanke told The Current host Anna Maria Tremonti.
Of course by that time, there was really little the U.S. central bank could do to prevent the bubble from popping, setting off a global financial meltdown and necessitating a multibillion-dollar bailout of the banks that had contributed to the crisis.
Years of low interest rates had allowed consumers to borrow recklessly. After they had access to that money, they used it to overinflate the entire economy, buying consumer goodies and bidding up the price of real estate.
By then, it was too late to raise interest rates. It could have been done several years previously, slowing the boom before it became dangerous. So why didn’t Bernanke, or his predecessor Alan Greenspan, act then?
There may be clues from listening to our own central banker’s speech this week.
…click on the above link to read the rest of the article…
On the economy, politicians debate, central bankers decide
Bank of Canada pushing stimulus; Conservatives, NDP talking austerity. Go figure
The idea that a prime minister is the “steward of the economy” is a convenient bit of fiction, co-created by politicians and the journalists who cover them.
It was an explicit theme of last night’s leaders’ debate; at one point, the moderator actually asked NDP leader Tom Mulcair “why should the electorate hand the national economy over to you?”
- Federal leaders trade pointed barbs during economy debate
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- Follow CBC’s complete election coverage
This notion is convenient to prime ministers because of their need to appear in charge of everything; convenient to opposition leaders, who need to assign blame for everything; and convenient to those journalists who thrive on reductive, easily digestible notions that smell like truisms.
In reality, though, a prime minister gets to decide how federal spending is allocated, and federal spending accounts for roughly 15 per cent of the $1.8-trillion Canadian economy.
Actually, even that is too sweeping: the prime minister decides how a portion of that 15 per cent is spent.
Most federal spending is structurally entrenched (entitlement programs, equalization payments, transfers to provinces, etc.) or politically entrenched.
Enter Stephen Poloz
Still, there is one Canadian official who probably does deserve the steward-of-the-economy title. It’s almost his job description, but you won’t hear much about him during this campaign, because he isn’t running for election, and because most people have only a dim understanding of what he does. He went unmentioned in last night’s economic debate.
But Bank of Canada governor Stephen Poloz not only has the unilateral power to change the financial circumstances of almost every Canadian tomorrow, he is almost certainly considering at the moment whether he should use it.
…click on the above link to read the rest of the article…
Time Bomb under Canada’s Housing Bubble Makes a Loud Tick
Time Bomb under Canada’s Housing Bubble Makes a Loud Tick
The Bank of Canada has been fretting about the ballooning debt of Canadian households. Last year, it repeatedly called it a risk to “financial stability,” perhaps in preparation for raising its benchmark interest rate. Then Canada’s economy tanked.
In July, when the freaked-out Bank of Canada cut its benchmark rate for the second time this year, it admitted that the rate cut comes at the price of “financial stability risks” which “remain elevated.” Governor Stephen Poloz added: “Of particular note are the vulnerabilities associated with household debt and rising housing prices.”
These rate cuts didn’t do much to support Canada’s resource economy that has been spiraling down in the wake of the commodities rout. But they made up for it by inflating the housing bubble even further.
The Teranet–National Bank house price index, released September 14, hit new records every month this year. In August, it was up 5.4% year-over-year. Note how the index has soared since the peak of the prior housing bubble that ended with the Financial Crisis:
The index masks what Marc Pinsonneault, senior economist at NBF’s Economics and Strategy, calls the “dichotomy” of Canada’s housing market. In some cities, price increases are cooling, year over year: Victoria +3.2%, Edmonton +0.8%, Calgary +0.7%. In other cities, prices are actually falling year-over-year: Winnipeg -0.4%, Ottawa-Gatineau -0.4%, Montreal -0,5%, Quebec City -0.7%, and Halifax -1.4%.
But they’re sizzling in Vancouver +9.7%, Hamilton +8.8%, and Toronto +8.7%. And prices for non-condo homes in Vancouver and Toronto – the two cities account for 54.1% of the index – jumped over 10%!
On cue, total consumer debt rose 4.9% year-over-year in July to C$1.86 trillion. A trend that has been picking up speed recently: on a monthly basis, consumer debt jumped in July at an annualized rate of 5.4%. Mortgage debt – over two-thirds of total consumer debt – soared at an annualized rate of 6.9%.
…click on the above link to read the rest of the article…
Interest rate cuts a two-edged sword for Bank of Canada: Don Pittis
Another decrease could spur exports but would announce serious pessimism
Conjure up an image of Bank of Canada governor Stephen Poloz in Hamlet pantaloons, hand to brow, declaiming to the middle distance: “To cut or not to cut?”
A confusion of contradictory economic data means it may be a melancholy choice. If the Bank of Canada were to lower interest rates for a third time this year at this Wednesday’s meeting, the cut could spur exports and challenge other countries that have pushed their currencies lower.
But there is a danger that it may instead be taken as a warning.
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A poll of 40 economists last week by Reuters didn’t rule out another cut in rates. The consensus was that there was a one in four chance of a cut this week, and a 40 per cent chance of another cut “at some point.” But the most likely result, said the economists, was a rate freeze till 2017.
Frozen
More than a year of rates frozen at 0.5 per cent is not a resounding vote of confidence in a Canadian recovery. But in the face of that steady-as-she-goes opinion from economists, another rate cut would be a two-edged sword.
Cutting interest rates would help keep the Canadian property market strong. (Darren Calabrese/Canadian Press)
Lower rates would make it easier for Canadians to keep up their borrowing binge, helping retail sales and keeping house prices strong. More usefully, it would help secure lending for struggling or expanding businesses.
A byproduct of lower rates is a lower loonie. If, as many have said, our shrinking trade deficit can be credited to a low Canadian dollar, then a still lower loonie could be even better.
…click on the above link to read the rest of the article…
QE is “Not on the Table,” says Joe Oliver
QE is “Not on the Table,” says Joe Oliver
In a world where central banks are given free rein over the supply of money and credit, and where any examination of these secretive institutions is considered interference with their “independence,” Finance Minister Joe Oliver’s comments about QE have not gone unnoticed. The other week Oliver was quoted as saying that quantitative easing was “not on the table” as a tool to combat the “economic downturn.”
Economic professors and commentators around the country criticized the Finance Minister, saying that he overstepped his power. Ian Lee of Carelton’s University’s Sprott School of Business said, “You may think that, you may privately say that, but that’s not the sort of thing I think the minister of finance should be saying.” Stephen Gordon, an econ professor at Laval University, agreed, calling the comments “worrisome.”
Because, you know, the Finance Minister is not supposed to comment on the country’s finances. Especially when the federal government is the sole shareholder of the Bank of Canada.
In October 2013, the late Jim Flaherty told reporters something similar. He did not support the US Fed’s bond-buying program known as QE. At the time, Flaherty’s stance was at odds with Bank of Canada Governor Stephen Poloz’s. However, Poloz has stated that a QE decision would be a joint-effort between the Bank and the federal government’s finance ministry.
Quantitative easing, for those who don’t know, is when the central bank prints money and then uses the fiat to purchase government bonds. The new money, once circulating in the economy, appears as a liability on the central bank’s balance sheet, whereas the new bonds are supposed to resemble interest-earning assets. Central bankers do this when they can’t push interest rates any lower. Often it’s after a solid hour of head-scratching when they decide that the problem is that they simply haven’t created enough inflation.
…click on the above link to read the rest of the article…
Don’t Call it a Recession!
Don’t Call it a Recession!
“But pretty soon the word “recession” also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957–58. For since then, we have only had “downturns,” or, even better, “slowdowns,” or “sidewise movements.” So be of good cheer; from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are “slowdowns.” Such are the wonders of the “New Economics.” — Murray Rothbard, Economic Depressions: Their Cause and Cure
Forty-six years later and Bank of Canada Governor Stephen Poloz has jumped on the semantic fiat bandwagon, calling the “r” word unhelpful. What Canada experienced in the early months of 2015 with the drop in oil prices and its subsequent effects was merely a “mild contraction.”
Okay folks, show’s over, nothing to see here.
“I just find the discussion quite unhelpful,” Poloz told the press, “It’s especially unhelpful when what has happened to the economy is very narrowly defined.”
Yes, narrowly defined to the oil and gas sectors. The other 80% of the economy is doing just fine thank you very much. All those service sector jobs and real-estate related industries, like construction and banking and insurance. Nothing to worry about! Never-mind the fact that energy is a major export and that without these exports there are no imports. Imports that facilitate the real estate, construction, and service sector.
Now Poloz isn’t that clueless. He did mention the “outsize effect” where the oil and gas industry slow-downs start to affect the broader economy. But, remaining in a state of Keynesian ignorance, Poloz felt bold enough to proclaim: “The Canadian economy is undergoing a complex and significant adjustment.”
…click on the above link to read the rest of the article…
Stephen Poloz’s Zen Moment
Stephen Poloz’s Zen Moment
To cut or not to cut, that is the question. And fortunately for Bank of Canada Governor Stephen Poloz, it was a pretty easy question. A lagging US recovery, China’s downturn, lower oil prices and “bad weather” all contributed to this interest rate cut. “I wouldn’t describe it as a close decision,” he told the press, “It’s a decision where we had a number of trade-offs on the table. It requires a lot of deliberation and a lot of inputs, not a mechanical decision. Not even close.” But whereas Poloz admitted to feeling comfortable at the end of 2014, now there was a bunch of crap heading for the ceiling fan and that interest rate cut was Canada’s only way of taking cover.
Poloz is known for his metaphors but the above is mine. Poloz used the parable of the big oak tree to compare “analysing vulnerability” in the economy. The big oak tree is only a risk if there’s a branch that could break off and fall into your neighbours house. In Poloz’s mind, cutting interest rates must have been like sawing off that branch. He may have successfully migrated some future risk, but in doing so he didn’t bother with any long-term consequences. He may have sawed off that branch so it wouldn’t fall into the neighbours house, but by cutting without thinking ahead, the branch fell right into the neighbours house.
I hope that’s clear, because a lot of what the Bank of Canada says isn’t. Poloz is a fan ofGreenspeak but sometimes we get moments of incoherent clarity such as: “When other things are equal, a lower currency will be a stimulus to the economy.” When asked if China’s slow-down could affect Vancouver’s housing market and potentially the broader economy, Poloz crept back to his Greenspeak with a definite “I don’t know” and “I won’t speculate” sprinkled on top.
…click on the above link to read the rest of the article…
Bank of Canada Decides More Bubble-Blowing is Needed
Bank of Canada Decides More Bubble-Blowing is Needed
You Can’t Keep the Printing Press Idle for too Long …
We have recently portrayed Canada’s new central bank governor Stephen Poloz, to whom we have alternately referred to as a comedian and a delusional bubble blower. This may perhaps strike some readers as uncharitable; then again, central economic planning bureaucrats should be fair game, especially as nearly all of them are slaves to hoary inflationism and are apodictically certain to do grave damage to the economy, based on economic theories that at best deserve to be called a form of voodoo. It’s really that bad.
Mr. Stephen Poloz, Canada’s new bubble-blower in chief, gazing into the distance – presumably in a futile attempt to divine the future.
Photo credit: Adrian Wyld / The Canadian Press
As readers may recall, Mr. Poloz has continued where his fellow bubble-blower and predecessor Mark Carney left off, by keeping the bubble blown with all his might. We imagine he may be a bit intimidated by the truly daunting size the combined real estate and consumer credit bubbles have attained in Canada. To call them monuments to monetary megalomania would be an understatement. Among developed nations, only the bubbles in a few Scandinavian countries and Australia can hold a candle to them.
Surely Poloz must be aware that there can simply be no painless way of getting out of this mess. Hence, he is trying to delay said end, possibly in the hope that the bust can be postponed beyond his watch (Carney showed judicious timing, we think, when jumping off the Canadian ship).
We were therefore decidedly unsurprised when it emerged yesterday that the Bank of Canada has cut rates again – apparently the Canadian economy has entered an official recession, which must however not be mentioned (!).Really.
According to the Financial Post:
…click on the above link to read the rest of the article…
Bank of Canada Sees Global Economy, Freaks Out, Cuts Rate, Warns of Financial Stability Risks, Loonie Plunges
Bank of Canada Sees Global Economy, Freaks Out, Cuts Rate, Warns of Financial Stability Risks, Loonie Plunges
The Bank of Canada took a good look at the Canadian economy, saw it was sinking into the mire, glanced at the collapsed prices of commodities, particularly oil, saw how they were wreaking havoc in Canada, and then looked at the global economy, particularly at China and the US, and it freaked out.
It cut its overnight rate 25 basis points to 0.5%, the second rate cut this year, and attached a gloomy view about the Canadian economy with as it said a “significant downgrade” from its last estimate issued only in April. Things are heading south fast.
In his opening statement, Governor Stephen Poloz blamed oil, China, and dropping exports, particularly to the US which is “still a puzzle that merits further study,” he said, as the swooning Canadian dollar should have pushed up exports. The three culprits:
First, Canadian oil producers have lowered their long-term outlook for global oil prices, and have cut their plans for investment spending significantly more than previously announced.
Second, China’s economy is undergoing a structural transition to slower, domestic-driven growth, which is reducing Canadian exports of a range of other commodities.
Third, Canada’s non-resource exports have also faltered in recent months. While this is partly due to the first-quarter setback in the U.S. economy, it’s still a puzzle that merits further study.
This splits the economy in two, with the “resource economy” falling off a cliff, and with the “non-resource economy” motoring forward. Alas, they’re “not independent – the cancellation of an investment in the oil patch will often lead to a hit in the manufacturing sector, for example.”
Ah yes, and the ballyhooed positive effects of lower oil prices? They “have been slow to emerge.”
…click on the above link to read the rest of the article…
USDCAD Surges To 6 Year Highs As Bank Of Canada Slashes GDP Forecasts, Unexpectedly Cuts Rates
USDCAD Surges To 6 Year Highs As Bank Of Canada Slashes GDP Forecasts, Unexpectedly Cuts Rates
In what seems to have surprised FX trader, Bank of Canada has taken an ax to growth forecasts and rates…
*BOC CUTS CANADA 2015 GDP FORECAST TO 1.1% FROM 1.9%
*BANK OF CANADA CUTS 2Q GDP ESTIMATE TO -0.5% FROM 1.8%
*BOC SEES INCREASED DOWNSIDE RISKS TO CANADIAN INFLATION
*BANK OF CANADA CUTS BENCHMARK INTEREST RATE TO 0.5%
*CANADA OIL AND GAS INVESTMENT TO SHRINK 40% IN 2015, BOC SAYS
*BOC PROJECTIONS ASSUME CANADA DOLLAR AT 80 U.S. CENTS
Furthermore, it warns that “consumer debt vulnerabilities are edging higher” and export weakness is “puzzling.”
USDCAD exploded to 6 year highs..
Full Statement (link):
The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.
Total CPI inflation in Canada has been around 1 per cent in recent months, reflecting year-over-year price declines for consumer energy products. Core inflation has been close to 2 per cent, with disinflationary pressures from economic slack being offset by transitory effects of the past depreciation of the Canadian dollar and some sector-specific factors. Setting aside these transitory effects, the Bank judges that the underlying trend in inflation is about 1.5 to 1.7 per cent.
…click on the above link to read the rest of the article…
Bank of Canada interest rate decision: To cut or not to cut?
With interest rates at historic lows, could it possibly make sense to go even further?
It came as a shock to just about everyone when Bank of Canada governor Stephen Poloz announced the central bank would lower its benchmark lending rate in January to 0.75 per cent.
That’s because after more than four years with a historically low one per cent, Canadians had been hammered with repeated warnings to pay down debt because lending rates were bound to go up — at some point.
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Then a cratering oil price changed the narrative. When the bank cut rates in January, it was six months into an oil drop that saw crude go from $95 a barrel this time last year to under $50. That was devastating for the oil patch — but also for the rest of Canada’s economy.
“This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada,” the bank said in explaining its bombshell rate cut.
Eagle eye on inflation
Although the bank keeps an eye on all sorts of economic data, the most important one from a monetary policy perspective is inflation — the upward creep of prices over time. The bank has a mandate of inflation targeting because according to many economists, if you can keep inflation in a narrow band between one and three per cent, everything else in the economy — from jobs, to GDP and the like — tends to take care of itself.
Lower lending rates make borrowing easier, which stimulates spending and investing, which nudges up inflation. Raising rates does the opposite. At least, so goes the theory.
When the bank cut rates in January, it raised the possibility of another one down the line. With Canada’s inflation rate currently at 0.9 per cent, there would seem to be ample wiggle room to cut again.
…click on the above link to read the rest of the article…
Side-Effects Include: Household Debt
Side-Effects Include: Household Debt
Bank of Canada Governor Stephen Poloz fancies himself a surgeon. He compares cutting interest rates to life-saving surgery for the economy. I consider it more like bloodletting, a terrible practice that is now widely accepted as pseudoscience. According to Canada’s central banker, if the interest rate cut resulted in an increase of household debt, that should be viewed as a necessary side effect.
If the Bank of Canada has one job it’s to focus on the 2 per cent inflation target and that means cutting the benchmark rate by 25 basis points when global crude oil prices tumble. Or at least, that’s what Stephen Poloz said to the central bank of central banks, the Bank for International Settlements.
“If the doctor says you need surgery to avoid death, the side effects usually don’t deter you, you just go ahead and manage them somehow,” Poloz said. “Other issues must be subordinate and I think of them as side effects.”
Likewise, if a bloodletter tells me I need to balance my “humors”, the side effects of losing so much blood won’t deter me. I’ll just go ahead and manage them somehow.
Of course, what Poloz is really saying is that the Bank needed to intervene to prevent death, or rather, a contraction of credit and available money. The side effects of more household debt, the prospect of higher prices in the future, the misallocation of resources – those are all side effects where the alternative is deflation. And we can’t have that.
“When we cut rates to stabilize the economy we don’t picture some heavily indebted household going out and adding to their debt pile, rather we picture a household with no debt at all deciding finally to buy a house and taking out a mortgage,” Poloz said.
…click on the above link to read the rest of the article…
Is Canada Next?
Is Canada Next?
“All of that negative news has kind of put a downer on consumer sentiment,” is how Jharonne Martis, director of consumer research at Thomson Reuters, explained the crummy consumer confidence reading on Friday.
The Thomson Reuters/Ipsos Canada Primary Consumer Sentiment Index haddropped to 51.6, the lowest so far this year and well below the 56.4 of last August before the oil-price crash soured the mood. By comparison, since 2010, the index has mostly been in the mid-50 range.
The “negative news” has extended beyond the price of oil. She pointed at some well-known retailer chains that have shut their stores in Canada recently, including Target, Future Shop, and photography retailer Black’s.
Already on March 30, Bank of Canada governor Stephen Poloz had warned that economic growth would be “atrocious” in the first quarter “because the oil shock is a big deal for us.” And he was right, with GDP dropping 0.6% annualized, the first quarterly decline since 2011.
It didn’t help that the Bank of Canada, in its Financial System Review released on Friday, pointed out that household indebtedness and the housing bubble were the top two vulnerabilities that threatened Canada’s financial stability. The top vulnerability:
“Elevated” – actually dizzying – “level of household indebtedness”:
The vulnerability associated with household indebtedness remains important and is edging higher, owing to an increase in the level of household debt and the ongoing negative impact on incomes from the sharp decline in oil prices. In addition, the quality of household debt may be decreasing at the margin….
Household leverage has been pushing relentlessly higher. In the first quarter,according to Statistics Canada, the household-debt-to-disposable-income ratio edged down a smidgen for the first time in four quarters, from its all-time high, to 163.3%. Debt increased once again, but this time slightly less than income.
…click on the above link to read the rest of the article…
Should Stephen Poloz be more worried about the Canadian economy?
Blandly reassuring, is Bank of Canada governor really ready if something bad happens?
I hope Bank of Canada governor Stephen Poloz was putting on a brave face.
Despite a warning that risks had increased, mostly due to the property market, the avuncular Poloz was blandly reassuring when he met with the media yesterday to discuss the bank’s latest Financial System Review.
His senior deputy Carolyn Wilkins was even more hypnotically nerveless.
- Economy better able to withstand oil shock, Bank of Canada says
- Canadian dollar on the rise as greenback weakens
Not that we wanted our two most senior central bankers to be wailing and renting their garments in despair. Of course it is nice to feel that Canada’s financial system is in cool hands.
But is the governor lulling us to sleep when we need to be very wide awake?
Why worry?
We must just hope that behind the scenes, in the Bank of Canada war room, the soothing Poloz and ice-cool Wilkins expose themselves to a few more terrifying scenarios. Because a survey of credible sources says the world, and the Canadian economy, remain fraught.
While it may be nice for a firefighter to reassure you that modern houses seldom burn down, the fire chief you want racing to your flaming home is one who fears the worst and knows what to do when it happens. Chief central bankers should think like firefighters.
Even while upping the housing risk, Poloz played it down.
“Overvaluation remains a concern,” he said in his prepared remarks. “But the probability that a sharp correction in house prices will occur remains low.”
Even if that should happen, said Poloz and Wilkins, the systemic risk — that is, the risk for the wider Canadian economy — is reduced by the fact that the bad effects of overvaluation will only hit some households in some regions. Vancouver and Toronto, are “showing some strengths,” said Wilkins, but outside those two centres prices are “easing quite nicely.”
…click on the above link to read the rest of the article…
