Canada Monetary policy

Less than clear path of recent monetary policy in Canada

The former Bank of Canada governor, Mark Carney used to say, a strong Canadian dollar (lonnie) benefits Canadians overall. Since the new governor, Stephen Poloz took over, monetary policy began in favor of a weak lonnie. However, the recent monetary policy seems to have lost a clear direction.

In late January 2015, the Bank of Canada, to the surprise of every one, cut its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. “This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada”. The oil prices began to drop since middle 2014. If the interest cut was for oil price, the cut would be too late. This is because monetary policy has long delay to have impact on the real economy. Second, one would expect several interest rate cuts so to generate a meaningful impact. The course, however was changed at the monetary meeting last week, where the Bank indicated there would be no more interest cuts.

I think cutting interest rate in January was not the best monetary policy.

First, low oil prices benefit every consumers, so that consumers would have extra money to spend somewhere else. This is good for the economy at national level. The negative impact of low oil price is limited to a few oil producing provinces in Canada. Monetary policy is to deal with issues at the national level. For economic difficulties at local levels such as in the oil producing provinces, government fiscal policy, rather than monetary policy would be more appropriate.

Second, since January this year, the Canadian dollar in response to the changes in the monetary policies, has lost value by almost 10% before rebound by 2.5% last week. The weak currency generated large import inflation in the first quarter of the year. This is reflected in the inflation data published last week, and is clearly felt by Canadians who are paying higher and higher at glossaries. Canadian did not get full benefit from the ultra low oil prices as the low currency works against lowering gasoline prices.

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