Loonie singed by BoC ‘stealth’ campaign

OTTAWA — Rather than cut its near-record-low interest rate and risk aggravating household debt with even easier credit, the Bank of Canada is hoping a lower dollar will spark a pickup in the economy.

With both domestic and global output struggling for sustained growth, policymakers here opted on Wednesday to keep their trendsetting lending rate on hold at one per cent, where it has been idling for more than three years.

Stephen Poloz, now in his seventh month as bank governor, is continuing along a path set in October — when he took a neutral stance on interest-rate movements, even though policy-makers had long-insisted the next adjustment would be up.

The new focus of the bank is “seemingly aimed at a stealth easing (of interest rates) through the exchange rate,” said Avery Shenfeld, chief economist at CIBC World Markets.

Wednesday’s announcement “added fuel to the fire that has been singeing the loonie’s wings of late.”

Benjamin Reitzes, senior economist at BMO Capital Markets, said the weaker dollar — now below 94 U.S. cents, the lowest in three years — is “no doubt pleasing policymakers at the Bank of Canada.”

Poloz, who took over as governor in June after Mark Carney left to head the Bank of England, added a tone of caution over Canada’s extremely low rate of inflation, even as the threat of high household debt — fuelled by rock-bottom lending levels — appears to be moderating.

“The housing sector has been stronger than expected but is consistent with updated demographic data and a pulling forward of home purchases in light of favourable financing,” the bank said in its rate announcement, adding that it “continues to expect a soft landing in the housing market.”

“The risks associated with elevated household imbalances have not materially changed, while downside risks to inflation appear to be greater.”

CIBC’s Shenfeld said the bank “has a more dovish tilt than before, by explicitly stating that downward risks to inflation are greater. “

“The bank is thereby adding fuel to recent weakness in the dollar, perhaps intentionally so,” he said.

“It’s notable that in one of his first days on the job, Poloz expressly denied that he would aim to take the Canadian dollar weaker, but only months later, he seems to be trying to do just that by opening the door, ever so slightly, to the possibility of a rate cut ahead.”

By implying the bank’s key rate may be lowered, Poloz is probably hoping a weaker dollar will underpin a recovery by making exports cheaper and reversing the decline in that sector, for one, without fuelling consumer debt through another drop in borrowing costs.

The momentum of U.S. growth is a major ingredient for Canada’s recovery, given it remains this country’s No. 1 trading partner. Increased activity in the United States will be relied on to lift Canada’s exports and business investment, a scenario Poloz, previously the head of the Crown agency Export Development Canada, has been promoting since replacing Carney.

But the bank is still waiting for those signs to emerge and begin the long-sought rotation away from a consumer-fed economy, which was encouraged by Carney’s desire to keep borrowing costs at near-record low levels coming out of the 2008-09 recession.

Record-high household debt and a still-exuberant housing market, regardless, are causing concerns for the Bank of Canada.

Charles St-Arnaud, an economist at Nomura Securities in New York, said “it seems that the balance between the two has shifted slightly in favour of the worries about low inflation.”

“This suggests to us that the BoC is gradually shifting its policy toward a rate cut,” he noted.

“Given the increase in household disposable income and the savings rate in Q3, while credit growth moderated on the quarter, we would not be surprised if the ratio of household debt to disposable income declined slightly on the quarter, somewhat reducing the BoC’s concern about household imbalances.”

There are tentative signs that Canada’s economy is picking up speed. In the third quarter of this year, growth increased by a surprisingly strong 2.7 per cent — though few economists expect that pattern to spill over into the fourth quarter.