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Bank of England Now 2nd Central Bank to Taper, After Canada, but Denies Tapering is “Tapering,” also Following Canada

May 7, 2021

Bank of England Now 2nd Central Bank to Taper, After Canada, but Denies Tapering is “Tapering,” also Following Canada

The Big Taper starts one central bank at a time. But you gotta keep the markets from swooning with a bit of welcome delusion.

The Bank of England’s Monetary Policy Committee (MPC) today announced that it voted unanimously to maintain its policy rate at 0.1%. But in terms of its asset purchases, it took the trail the Bank of Canada blazed last November and then widened in April: tapering.

The BoE announced that the blistering pace of its asset purchases would be “slowed somewhat”  – tapering the bond purchases from £4.4 billion a week to £3.4 billion a week – but that this tapering was an “operational decision” that “should not be interpreted as a change in the stance of monetary policy.”

This “is not a tapering decision,” emphasized BoE governor Andrew Bailey during the press conference. The reason this tapering is not “a tapering decision,” he said, is because the BoE left its target for the final level of QE assets unchanged.

Unlike the Fed, the BoE doesn’t have an open-ended QE, but had set a target of bringing its holdings of UK government bonds to £875 billion and its holdings of corporate bonds to £20 billion, for a combined target of £895 billion. And at the meeting, the BoE didn’t change these “fixed amounts,” as Bailey put it.

Obviously, denying that tapering is tapering was designed to mollify the markets with a welcome dose of delusion, and it worked: the UK’s stock index FTSE 100 rose 0.5% for the day.

However, when the members voted on maintaining the target of £895 billion, it wasn’t unanimous, with eight members voting for maintaining it, and one member, outgoing chief economist Andy Haldane, voting to lower it by £50 billion, to £845 billion.

…click on the above link to read the rest of the article…

 

Loonie Tumbles After BOC Warns There Is “Increased Uncertainty” About Future Rate Hikes

March 6, 2019

Loonie Tumbles After BOC Warns There Is “Increased Uncertainty” About Future Rate Hikes

Another central bank appears to be throwing in the towel on any future rate hikes.

Just days after Canada reported an abysmal December GDP print, which declined for the second consecutive month and sparked fears of an imminent technical recession…

… the Bank of Canada today kept its rate unchanged at 1.75%, as expected, however the statement was so dovish it shocked the market, which sent the Loonie tumbling.

In keeping the rate flat, the Bank of Canada acknowledged the “mixed” data picture, which suggests “increased uncertainty” about timing of “future rate increases”, and said lower than neutral interest rates are “warranted” given outlook, confirming that just like the Fed, the BOC is now also on “pause.”

Indeed, in borrowing a page from the Fed’s playbook, the BOC said the “outlook continues to warrant a policy interest rate that is below its neutral range” and added that “with increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets, and global trade policy.”

The BOC also said that given the “mixed” data picture, “it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook.”

Finally, admitting that it too was too optimistic heading into 2019, the bank said that “the slowdown in the fourth quarter was sharper and more broadly based” as “consumer spending and the housing market were soft, despite strong growth in employment and labour income. Both exports and business investment also fell short of expectations.”

Following the sharply dovish announcement, the loonie tumbled  further and Canadian bond yields extend declines: the USD/CAD jumped +0.6% at ~1.3426 after rising as much as 0.7% as stops were triggered, rising as high as 1.3441.

The good news for loonie bulls? At least the BOC isn’t discussing rate cuts just yet. That said, Rabobank notes that it does “not expect any further rate increases this cycle and expect the BoC to cut rates 25bp in 2020 Q2.”

Loonie Tumbles After Dovish Bank of Canada Hikes By 25bps, Warns Of NAFTA Uncertainty

January 17, 2018

Loonie Tumbles After Dovish Bank of Canada Hikes By 25bps, Warns Of NAFTA Uncertainty

As expected by a broad majority of economists, the Bank of Canada just hiked its overnight rate by 25bps to 1.25%, the first hike by a G-7 central bank in 2018.

In raising the rate, the BoC said that “recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity” however in a dovish twist the BOC added that “as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgement on business investment and trade.

From the bank’s forecasts:

In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon.

The central bank also sees the following key indicators:

CPI Inflation Y/Y:

  • 2017 Q2:1.3%, last 1.3%
  • 2017 Q3:1.4%, last 1.4%
  • 2017 Q4:1.8%, last 1.4%
  • 2018 Q1:1.7%

Real GDP Y/Y:

  • 2017 Q2:3.6%, last 3.7%
  • 2017 Q3:3.0%, last 3.1%
  • 2017 Q4:3.0%, last 3.1%
  • 2018 Q1:2.7%

However, what appears to have spooked traders is the general dovish context of the statement:

Looking forward, consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines, while business investment and exports are expected to contribute more. The Bank’s outlook takes into account a small benefit to Canada’s economy from stronger US demand arising from recent tax changes. However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgement on business investment and trade.

As a result of the unexpected dovish addition, while the loonie initially kneejerked higher, it has since given up all gains and is now near the lows of the day.

…click on the above link to read the rest of the article…

Bank of Canada Shuts Out Free Market Economists from Key Policy Conference – Peter Diekmeyer

September 8, 2017

Bank of Canada Shuts Out Free Market Economists from Key Policy Conference – Peter Diekmeyer

 

Next week’s Bank of Canada policy conference appears set to deliver standard talking points. Not a single free market economist has been invited and a BOC spokesperson confirmed that the alternative-financial press is also being shut out.

The BOC event, titled Monetary Policy Framework Issues: Toward the 2021 Inflation Target Renewal , takes place during a critical time for Canada’s central bank.

Bank of Canada economists emerged from the 2008 financial crisis red-faced, after having failed to predict the event in advance, despite the clear warning signs and having some of the country’s most respected practitioners on staff.

The BOC then had to bail out Canada’s big five banks, whose solvency the monetary authority is charged with overseeing.

Questions regarding Poloz’s “trickle down”economics

Things do not appear to have improved much under the reign of Stephen Poloz, its current Governor.

The Bank of Canada ranks last among the G-7 central banks in terms of its gold holdings, this during a time of record high Canadian household debts and one of the planet’s biggest housing bubbles.

There are also increasing questions regarding Mr. Poloz’s “trickle down” economics strategy, which consists of leveraging “considerable economic stimulus” to boost asset prices, in the hope that a resulting “wealth effect” will trickle down to the poor and the young.

Government-financed academics, officials and a government financed NGO

A quick look at the presenters at the upcoming event reveals the usual “broad range of opinions” that Canada’s central bank consults.

The 20 panelists, almost all of whom are financed or regulated by government, include:

  • Four Canadian government employees
  • Eight academics from Canadian universities, which draw the vast majority of their funds from government.
  • One presenter from a Canadian think tank that received a reported $30 million in government money
  • One representative representing Canada’s big banks, which were bailed out by governments during the last financial crisis.

…click on the above link to read the rest of the article…

Bank of Canada Raises Interest Rates… Again

September 6, 2017

Bank of Canada Raises Interest Rates… Again

stephen-poloz1-300x225For the second time in less than two months, the Bank of Canada has raised interest rates.

On Wednesday, the central bank raised its overnight lending rate by a quarter per cent to 1 per cent.

The move surprised many who weren’t expecting a rate increase until later this Autumn.

Just like last time, the rationale behind higher rates was centred around the Bank of Canada’s belief that the economy is growing faster than expected.

Bank of Canada Governor Stephen Poloz said, “The level of GDP growth is now higher than the bank expected.”

Of course, this assumes that GDP measures anything.

The Canadian loonie surged after the announcement, climbing to 82 cents U.S.

The decision reinforces the message that easy money and low-interest rates are coming to an end. Of course, the bursting of Canada’s real estate bubble could reverse direction for the bank, using these recent rate gains as leverage to cut rates in order to “stimulate” the deflating economy.

But until then, analysts are expecting more rate hikes since many have confused consumer indebtedness and rising prices as economic strength.

The Bank of Canada won’t confirm these predictions since, according to the central bank’s statement, price controls on interest rates are, “predetermined and will be guided by incoming economic data and financial market developments.”

Of course, the Bank of Canada isn’t clueless when it comes to higher rates and indebted Canadian households. In the rate hike statement, the bank promised that “close attention will be paid to the sensitivity of the economy to higher interest rates,” given “elevated household indebtedness.”

The bank’s next scheduled rate-setting is Oct. 25.

All in all, today’s announcement puts interest rates back to where they were in January 2015, before Poloz made two surprising “emergency rate cuts” to deal with falling oil prices.

Canada’s “Other” Problem: Record High Household Debt

January 20, 2016

Canada’s “Other” Problem: Record High Household Debt

Earlier today, the Bank of Canada surprised some market participants by failing to cut rates.

True, the loonie was plunging and another rate cut might very well have accelerated the decline, further eroding the purchasing power of Canadians who are already struggling to keep up with the inexorable rise in food prices, but there are other, more pressing concerns.

Like the fact that some analysts say the CAD should shoulder even more of the burden as Canada struggles to adjust to a world of sub-$30 crude. In short, if Stephen Poloz could manage to drive the loonie lower, the CAD-denominated price of WCS might stand a chance of remaining above the marginal cost of production. Barring that, the shut-ins will start and that means even more job losses in Canada’s oil patch, which shed some 100,000 total positions in 2015.

Alas, Poloz elected to stay put, characterizing the current state of monetary policy as “appropriate.”

We’re reasonably sure that assessment won’t hold once the layoffs pick up and as we noted earlier, the longer Poloz waits, the larger the next cut will ultimately have to be, which means that if the BOC waits too long, Poloz may have to rethink his contention that the effective lower bound is -0.50%.

While there are a laundry list of concerns when it comes to assessing the state of the Canadian economy and the impact of either higher rates (the loonie is supported but growth is further choked off) or lower rates (the economy gets a boost but consumer spending is stifled as Canadians watch their purchasing power evaporate), perhaps the most important thing to remember is that Canada is now the most leveraged country in the G7.

According to a new report from the Parliamentary Budget Officer (PBO) the household debt-to-income ratio is now a whopping 171% which means, for anyone who is confused, “that for every $100 in disposable income, households had debt obligations of $171.”

…click on the above link to read the rest of the article…

Stephen Poloz’s Zen Moment

July 17, 2015

stephen-poloz4

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…

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Olduvai II: Exodus
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