By Tom Bradley

Now I know why I almost never comment on monetary policy!

Before I crawl back in my hole, however, I have a few comments on today’s announcement that the Bank of Canada (BOC) is lowering (yes, lowering) its key lending rate by one-quarter of a percent to 0.75%.

  • Clearly I should have couriered my letter to Ottawa instead of sending via Canada Post.
  • Wow! This is a huge message. The rate has been 1% for 4½ years and the U.S. Federal Reserve has been preparing the markets for rate increases this spring. Bank Governor Poloz and his colleagues are really worried about the Canadian economy.
  • My concern about central bankers attempting to micro-manage the economy has been reinforced. The Bank Governor said this rate decrease is to see the economy through the disruption in the first half of 2015 caused by the energy dividend ... oops, oil crisis.
  • Once again, the BOC is encouraging an economy that is already highly indebted to use more debt. It’s serving Red Bull to the sectors of the economy that are already over-stimulated – real estate and autos.
  • It seems unlikely that 0.25% is going to cause an energy company to drill more wells or an Edmontonian to buy a new F150.
  • The weaker loonie does, however, increase the price companies receive for their oil and gas. These commodities are priced in U.S. dollars.
  • The BOC faces a ‘moral hazard’. Can Canadian consumers take on as much debt as the banks will allow knowing that the BOC has got their back?
  • I admit to being confused by the consensus view that lower energy prices are going to hurt Ontario and Quebec. Slower activity in Alberta will have a ripple effect across the country (timing and magnitude TBD), but savings at the gas pump are real money in the pockets of consumers – immediate; meaningful; after-tax; not borrowed.
  • If the BOC’s targets for employment and economic growth are the same as they were 10 years ago, they’re too high. Over the last decade, growth has been fueled by governments and consumers spending beyond their means (rapid growth of mortgages, lines of credit, HELOCs, car loans and leases, and credit cards). The creditors will eventually take the fuel away, and maybe even ask for some of it back. We need to accept a slower normal.
  • I sort of understand the stock market reaction to the news (up sharply) and sort of don’t. With the loonie down 2%, companies that are selling to the rest of the world should logically be worth more in C$ terms. But, countering this relationship is the BOC’s message – Canada is in trouble.

As a “citizen concerned about the next 10 years, not the next 10 months”, I would like to see us deal with our debt problem on our own terms rather than letting other central banks and/or creditors force a solution on us. Mr. Poloz and company are smarter than I am and have more information. They must think we’re going to struggle through the next 10 months, so best not worry about 10 years.