OTTAWA – The Bank of Canada has a chance Wednesday to do in words what it won’t do in practice — further clip the wings of the loonie without actually changing monetary policy.
Economists are unanimous that for the umpteenth time the Canadian central bank won’t make any sudden moves on interest rates and choose to keep the trendsetting policy rate at one per cent, where it’s been since September 2010.
But a central banker has more arrows in the quiver than just moving around rates. Sometimes language alone can do the job it wants, as governor Stephen Poloz showed in October after removing bullish language on interest rates from his text.
The loonie fell almost a cent to 96.18 cents US and has been drifting lower ever since. It dropped to a two-year low below 94 cents Monday and was sliding lower still Tuesday.
A few words from Poloz on Wednesday could buck up the dollar, or sink it.
And while analysts say there is little chance of the former, the question is whether Poloz should take the opportunity to kick the currency while it’s down.
“I don’t think the bank will move to all the way to an easing bias (hinting at a rate cut) … but I suspect there could be a very quiet statement that suggests the weakness of the currency is not unwelcome,” said Doug Porter, chief economist with the Bank of Montreal.
“Almost from the day Mr. Poloz was appointed, I couldn’t help but wonder if the bank wouldn’t quietly welcome a weaker dollar. They wouldn’t say it that directly, but let’s just say they don’t have any issue with the weakness of the currency.”
The speculation that Poloz favours a low-flying loonie stems from his experience at Export Development Canada, where his job was to boost the country’s export performance. The lower the dollar, the more it helps exporters compete in foreign markets.
David Madani of Capital Economics notes the recent devaluation in the currency is also helping ease the central bank’s concerns about deflation, since it helps raise import prices.
He doesn’t believe Poloz is deliberately targeting a low dollar, but notes what it is doing for the bank — aiding exports, stabilizing inflation and all without having to cut interest rates, which would make it easier for debt-strapped households to borrow more.
“It helps the Bank of Canada achieve its objectives,” Madani says.
Poloz’s language — two weeks ago he doubled down on the bearish tone by telling a Senate committee he disagreed with an OECD recommendation that rates need to be raised in a year’s time — is not the only reason the loonie has had a rough ride of late.
Commodity prices, particularly for Canadian oil, continue to weaken and in contrast to the Bank of Canada, the U.S. Federal Reserve has been toughening up its language, leading markets to expect a tapering of the Fed’s stimulus bond-purchasing program early next year.
With all the weather-vanes pointing south, senior economist Jimmy Jean of Desjardins Capital Markets noted that even the above-expectation 2.7 per cent bump in third-quarter economic growth Friday did not deter talk in the markets of a potential Bank of Canada rate cut.
“Markets have realized Stephen Poloz’s true dovish nature,” said Jean.
Some analysts believe Poloz may have come to the conclusion he has done enough for now. The dollar is trending lower, and inflation — while weak — is not expected to drop further. As well, last week’s GDP figure, while puffed up by an inventory build-up, was nevertheless encouraging.
Madani said he believes the positives likely will keep Poloz neutral on Wednesday, at least until more is known.
“Tomorrow is an interim statement, so I wouldn’t expect any wholesale changes before the next monetary policy report (in January),” he explained.
By that time Poloz will have had the benefit of another GDP and inflation report, as well as two employment releases, from which to decide if the economy needs another nudge, either through action or words.