Monetary policy

Philosophical changes in conducting monetary policy by the Bank of Canada

Three days ago, the Bank of Canada announced to maintain the target for the overnight rate at 1 per cent after the latest monetary policy meeting. The Bank judged that the global economy is expected to expand modestly in 2013 and the U. S. Economy is softer than expected. It also lowered the expectation of the Canadian economic outlook since the near term global growth is less favorable for Canada.

This is the second monetary policy meeting since Stephen Poloz took over the governor position from Mark Carney this summer. I feel that a philosophical change is under way in conducting the monetary policy at the Bank of Canada. Mark Carney, the former governor, favored a strong Canadian dollar, and thought a strong currency overall would benefit Canada. Under Mark Carney, the Bank had pulled off some stimulus measures that were put in place since the financial crisis and Great Recession. As a result, the Canadian dollar had appreciated under the administration of Dr. Carney.

Stephen Poloz concerned that “uncertain global and domestic economic conditions are delaying the pick-up in exports and business investment” in Canada, and “the level of economic activity (is) lower than the Bank had been expecting”. Dr. Poloz worked for the Export Development Canada before he joined the Bank of Canada. His experience and background hinted that he might be tilt competitiveness of Canadian export and therefore favor a weak Canadian dollar, in sharp contrast to Dr. Carney’s philosophy.

The October monetary policy statement cited slower growth of households credit in Canada, a term that Mark Carney had worried over his course as the Bank governor. Inflation wisely, the Bank of Canada seems to have less worry, however inflation in Canada has been “persistently below target”. “Both total CPI and core inflation are expected to return more gradually to 2 per cent, around the end of 2015”. Operationally these are two signs suggest that the Bank of Canada will not raise interest rate anytime soon, as a matter of fact, it might cut interest rate if the economy shows sign of further slow growth. “The substantial monetary policy stimulus currently in place remains appropriate”, said the monetary statement.

The currency market responded to the latest policy rhetoric immediately. The Canadian dollar has weakened three days in row, down more than 1 cent. I think the looney has more room to depreciate and could move toward 90 cents U. S. dollar some time next year.