Bank of Canada steps up
It was at least a week late, but Bill Morneau finally put his bazooka on the table.
“We’re going to do whatever it takes to support and stabilize our economy,” the finance minister said at a press conference on March 13, flanked by Stephen Poloz, the Bank of Canada governor, and Jeremy Rudin, superintendent of financial institutions.
For those of you less versed in the coda of financial markets, that was Morneau doing his best impression of Mario Draghi, the former president of the European Central Bank who uttered that phrase — “whatever it takes” — in a speech in 2012 and almost immediately brought calm to the European debt crisis.
For whatever reason, the jumpy creditors of Greece, Ireland, Spain, and Italy simply needed assurance from a credible source that someone was on the case. And for whatever reason, it took the Canadian government two weeks and three separate stock- market routs to execute one of the simplest turnaround plays from the financial crisis.
The Bank of Canada did its part, cutting interest rates a half point on March 4, even though almost everyone agreed that it would take an aggressive use of fiscal policy to offset the economic impact of quarantines, cancelled flights, and a significant drop in commodity prices.
Prime Minister Justin Trudeau followed on March 11 with a promise to spend $ 1 billion on front- line health expenses and the race to find a vaccine for COVID-19. It was the right idea, but nowhere near enough to calm investors who had moved on to talking about how bad the global recession was going to be.
By holding back, Trudeau and Morneau were leaving themselves options to confront a crisis that was proving difficult to pin down. It was the prudent course for a couple of politicians who are routinely hammered for running a deficit. But it meant there was no cushion in place for the next shock to the system. That jolt came the evening of March 11, when the president of the United States announced out of nowhere that he was suspending travel from Europe for a month. Global markets went haywire. Canada’s main stock index plunged the most since the Second World War.
“Panic is not an endearing quality for policy-makers and/or government leaders, but if we were to offer a few unsolicited words of advice: come hard and come fast with monetary and fiscal stimulus, before consumer and business confidence is truly shattered by COVID-19,” Warren Lovely and Taylor Schleich of National Bank Financial said in research note published a few hours before Team Moreau assembled in Ottawa at around 2 p. m. local time. “Now’s not the time to underwhelm.”
Morneau runs the risk of underwhelming.
Draghi could command markets because he was revered by many investors, and he backed up his words with some of the most aggressive monetary policy the world has ever seen. The Trudeau government’s inconsistent handling of economic policy means it is held in less esteem. And while Morneau insisted that he was ready to unleash the government of Canada’s considerable “fiscal firepower,” he said he will wait until next week to pull the trigger. “We will be nimble in our responses,” he said. “We have your back.”
It was the Bank of Canada that had our backs on this historic day.
Stephen Poloz, the governor, announced a surprise interest- rate cut, dropping the benchmark rate by a half point for the second time in less than two weeks. The central bank also deployed a fleet of measures to ensure markets that government bonds and other financial assets don’t run dry of cash in the weeks ahead, as Poloz acknowledged markets were beginning to show signs of stress. Combined, the measures were meant to “give us a bridge across the trouble,” and the governor said the central bank was prepared to do more if necessary.
For his part, Rudin lowered the amount of capital that the country’s biggest banks must keep in reserve to reduce the risk of default. That will allow lenders such as Royal Bank of Canada and Bank of Nova Scotia to put more money in play, but there might be a quid pro quo. Morneau said the chief executives of the main lenders had “committed to me” that they won’t overreact to the crisis by squeezing borrowers. In other words, Ottawa is watching.
Rudin also set aside plans to relax the mortgage stress test. That’s important because there’s a risk that lower interest rate will re-inflate various urban housing bubbles. A recession could hurt the broader housing market, but a one- percentage- point drop in borrowing costs will be the equivalent of jet fuel for the real-estate industry.
Canadian markets rallied, partly because of lower interest rates, but perhaps mostly because U. S. President Donald Trump declared a national emergency and said the government would buy oil to prop up prices. Elsewhere, Germany pledged to set aside its commitment to strict fiscal prudence, and French President Emmanuel Macron said he would host a call of leaders of the Group of Seven on March 16.
All positive signs, but it will remain fair to wonder if at least some of the wealth destruction and panic of the last couple of weeks could have been avoided. Several forecasters now see a recession an inevitable.
Statistics Canada reported March 13 that household net worth rose about 1.6 per cent to $ 11.7 trillion in the fourth quarter, helped by the unrelenting ascent of stock prices to record levels. The report reads like the final chapter of story that is very different from the one that is about to unfold. “Enjoy the household wealth figures for the yearend,” said Mark Chandler, head of Canadian rates strategy at RBC Dominion Securities Inc. “They may be a long time returning.”