This past week the Bank of Canada held back and kept their overnight interest rate at 0.5%. Your loyal scribe was just as interested as I usually am regarding what my lost twin brothers was doing. (Bank of Canada Governor Stephen Poloz and I have an uncanny resemblance) There’d been quite a lot of buzz created lately that the Bank of Canada would reduce interest rates because of the worsening Canadian economy. So I was in the camp looking for a rate cut. I missed that one. The Bank of Canada decided the rate cut wasn’t needed and the Canadian dollar was better off for it.
These are particularly interesting times when it comes to the Canadian economy. I’ve written this column for 30 years now and I’ve commented regularly about interest rates. I have a great interest in monetary policy partly because of my background as an agricultural economist. You’ve heard my stories about 20% plus interest rates. However, at the present time with such low interest rates there is even the specter of negative interest rates coming into the planning horizon. I must say if we ever get to the point where we have negative interest rates and banks actually discount our deposits I might have to find a new career. Trying to understand that might be just too much for me.
Don’t say it can’t happen. It is already a reality in places like Sweden and Denmark. The point being that forcing capital into the economy can create jobs and wealth versus storing it away in some bank. However, right now, that’s a theory. Let’s leave it at that.
I am definitely a fan of the Bank of Canada. I find it particularly interesting as an institution and it does provide so much economic analysis to the public. In its latest Monetary Policy Report, the Bank of Canada explained the structural change currently going on in the Canadian economy. It has come about because of the precipitous drop in the price of oil. The Bank of Canada partly described it this way in the following three paragraphs taken from the report.
This shock is complex because it sets in motion several forces: Canada earns less income from the rest of the world, our resource sector begins to shrink, the Canadian dollar depreciates, and the non-resource sector expands.
One implication is that it may take up to three years for the full economic impact to be felt, and even longer for all of the structural adjustments to take place.
First, the Canadian dollar has declined significantly since October, which means that the non-resource sectors of our economy are receiving considerably more stimulus than we projected then. Let’s remember that it typically takes up to two years for the full effect of a lower dollar to be felt.
(Monetary Policy Report Jan 20, 2016)
It was all so interesting to me. In the report, the Bank of Canada went on to say that the low value of the Canadian dollar adds additionally to the inflation rate and that they will have to adjust to that. Clearly, this is a tenuous time for the Canadian economy. You don’t have the Bank of Canada talking about structural change long-term, without some serious economic ramifications for Canadians.
The implications for Canadian agriculture will be significant. Yes, like I documented last week the Canadian dollar value is good for farmers. However, we do not operate in a vacuum. We depend on the greater Canadian economy to be healthy. This helps us with domestic demand for our products. Of course, we all have families who do not necessarily work in agriculture and the need jobs. The point being a healthy Canadian economy is good for all of us. The Bank of Canada is telegraphing some of the structural change that it anticipates. In short, it’s not all “sunny ways”.
In the coming weeks we’ll learn how our government will deal with it. You can expect much fiscal stimulus. That means a lot of government spending, deficits much higher than you probably had ever imagined. Its true, the Liberal government campaigned on that, but they never saw this economy coming. The Bank of Canada is anticipating the change in fiscal policy through stimulus and will adjust accordingly.
That flow of farm iron heading south is no mirage. It’s one result of a low loonie with American buyers lining up. Will it continue? That’s likely, but what’s not so sure is the future of the Canadian economy. The Bank of Canada is talking about “structural change”. That’s code for major change, job losses, wealth losses and shifting economic playing fields. I suppose its nothing $100 oil wouldn’t cure. However, that’s $70 away. The challenge we have in Canada is the economic road ahead. This time it’s going to be bumpy.