Dear Bank Governor Poloz,
Let me first say that I’m a big fan. I appreciated your frankness in your early days on the job when you said that our dollar was too high. I’ve never seen a central banker so openly promote a weaker currency, but with the loonie in the high 90’s versus the U.S. dollar, Canada isn’t a low cost producer of anything, and is a high cost producer of most things.
And similarly, you’ve been candid about the housing market. I particularly liked your ‘crack in the tree’ analogy.
I’m writing today to encourage you to maintain this trend of not conforming to the central banker stereotype. Specifically, I’m referring to the Bank of Canada’s stance on short-term interest rates. It’s time we broke with some of the other players, including the Federal Reserve in the U.S., and started moving rates higher.
Why do I say this? Because rates are near zero and Canada has no cushion when (not if) we hit another rough patch. Whether it be an economic slowdown, or recession, or a global disruption of some kind, our best tool for dealing with such events is not in the shed. In the past, a slowdown would prompt your predecessors to lower the bank rate to help stabilize the economy and stimulate growth. You have no such lever today. Rates are at, or even below, recessionary levels and we’re not in a recession.
To be clear Mr. Governor, I’m not talking about short rates going back to 5%, although maybe that will be a reality one day, but let’s get the 1% up to 3%, or maybe a little higher.
I don’t pretend to understand all the pressures and complications you face, but it seems to me that now is the perfect time to break rank and start raising rates.
- I recognize that you have little scope to differ from what our gorilla trading partner to the south is doing, but the combination of a strong U.S. dollar, weak energy prices and our lower bond yields give you a unique opportunity to act.
- The loonie is in the mid-80’s and we’re a lot more competitive than we were. We now have room to carry a higher bank rate. Even if the dollar rallied for a few days, we’d still be in the 80’s and our newfound competitiveness firmly intact.
- Having said that, I’m not sure our petro-currency would even go up if you increased the bank rate. It’s pretty clear that it’s trading off of oil prices, not interest rates.
- The economy is not perfect, but it never will be. There will always be a reason to delay – Alberta is going to struggle for a while. But in the meantime, auto sales are booming, the housing market is robust and unemployment is back in the normal range. If you can’t raise rates in this kind of environment, when can you?
- Ms. Yellen has done your dirty work for you. The U.S. Federal Reserve Chairperson has said that rates are going up in 2015. You’re not going to shock people when you start to move. Canadians have already had a shot across the bow.
I know I started out by saying I’m a big fan, but I’ve got to be blunt with you. You’re an impressive guy, and an important one, but you don’t have as much influence as you think. The rock star of central bankers, Alan Greenspan, created an aura around the role that made people think central banks could manage the economy. Well, with all due respect Mr. Governor, you can’t. Certainly, you can and should set the table for institutions and businesses to operate with confidence, but the impact of your short-term moves will always be swamped by other factors, including the U.S. economy, commodity prices and technological change.
Mr. Governor, I implore you to break rank with your brethren and start raising interest rates in Canada. And don’t just go a quarter of a percent. Make it meaningful. Move a half percent at a time. Get us in a position where we can weather the next economic storm better than anyone else. We’re not in a position to do that today.
A citizen concerned about the next 10 years, not the next 10 months