Stephen Poloz Balances the BOC

Bank of Canada Stands Pat

As expected, the Bank of Canada (BOC) kept the prime lending rate at 3% yesterday.  This decision moves the clock to 3 years and 1 month with no change to the overnight lending rate and in turn the prime lending rate.  Currently set at 1% the overnight rate is well below its 10 year average of 2.07% and significantly below the high of 4.50% hit in July of 2007.  The rate is being kept low as part of the BOC’s economic stimulus plan.  In other words, low interest rates will help drive investment and spending which in turn should boost economic activity, create jobs and keep assets appreciating at an ideal rate.  The stimulus plan is regarded as a temporary government intervention, to be removed when the economy starts improving.  The reality is the economy has been growing slowly and the BOC’s forecasts continued slow growth until the end of 2015.

Although there was no change to the overnight rate, there was a significant change to the wording and tone of the press release.  Under the leadership of former Bank of Canada chief, Mark Carney, the announcements came with a consistent message that the current rate is a abnormally low, and that the interest rate will be going up in the near future.  The threat to raise rates became somewhat of a joke, in that the intent was an empty threat designed to prevent households from taking on more credit (see the “Mark Carney Fib“).

Yesterday’s announcement under the direction of Stephen Poloz was a breath of fresh air.  It was an honest assessment of the economy and of the direction of variable interest rates.  This balanced approach made it clear that a rate increase would be appropriate if inflation becomes a threat, and that a rate decrease would be appropriate if inflation drops to dangerous levels.  The subtleties of BOC announcements cannot be underestimated as they are intended to prepare the market for interest rate changes.  Stephen Poloz has put us on notice that interest rates can go either way.

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