Desperation in Bank of Canada Rate Cut

If there’s one job that I would like to have its the Governor of the Bank of Canada.  If I could have the levers on the Canadian economy just imagine all the things that I could do.  The funny thing is many people have told me that I have an uncanny likeness to Bank of Canada governor Stephen Poloz.  Yes, it is true; even I have to admit that.  So if I imagine really hard, maybe in a sense I get to almost trade places with him for any particular day.

Dreaming aside, the Bank of Canada governor last week announced another decrease in the bank rate down to .50 of 1%.  This decrease in the bank rate had been somewhat telegraphed unlike the time a few months ago when he reduced it to .75%.  I was widely anticipating the drop this time because with the recent increase in futures values for grain, I was anticipating a lower loonie to boost our cash prices again.  It happened in spades last week.

Bank of Canada governor Stephen Poloz in his announcement talked about how lower oil prices have hurt income levels and taken much investment out of the Canadian economy.  The Canadian economy actually contracted in the first two quarters of 2015 and in the classical sense that is recession.  Essentially, we are looking at growth rates in Canada this year of about 1% and that is less than half of what we were expecting.  The Bank of Canada governor had expected renewed growth in the economy, but he is not seeing it.  The decrease in the interest rate is about the only thing that he can do to stimulate the economy.

The problem is we are running out of bullets.  I think you of often heard me tell the story of how my first farm demand loan was given to me for the astronomical rate of 23.25%.  Now, the Bank of Canada governor has set the bank rate at .5 of 1%.  That is half a percent away from zero so there is little left that the Bank of Canada governor can do when he sees a lack of growth in the Canadian economy.  If he were starting from 23.25%, those levers would be a lot stronger.  In my mind there was a little bit of desperation in the move.

I was expecting a downward move in the value of the Canadian dollar after the announcement and that is exactly what we got.  Essentially, when interest rates are cut demand for the Canadian dollar goes down and so does its value.  Ontario soybeans and wheat have a straight foreign exchange conversion to cash prizes, which can go up explosively with a lower move of the loonie.  Ontario corn is similar, but not quite as sensitive to the move in the Canadian dollar as wheat and soybeans.  As I write this the Canadian dollar value is almost into the .76 US range.  This is giving a boost to cash values for grain and livestock across Canada.

Now you can bet that Stephen Poloz probably didn’t have his eye on Canadian agriculture when he made that announcement last week.  There are some analysts who say that the Bank of Canada has been doing this deliberately to lower the value of the Canadian dollar, which would have the effect of boosting exports and economic growth.  This usually works well and in the past I’ve seen it many times.  The problem that the Bank of Canada governor is facing this time is it seems so slow to get started and in fact economic growth has been surprisingly low.  That’s where the desperation comes in.  There is so much to this.

Simply put, housing prices are in the crosshairs as well as the rate of inflation.  Canadians have seen their homes especially in some of our urban centers rise in value tremendously.  At the same time with lower interest rates Canadians have loaded up on debt.  The lower interest rate has the potential to make all that worse.  Of course, if those rates ever go up again someday, the fear is all of that might come crashing down.  So it is a very important balancing act for the Bank of Canada governor as he helps manage the economy.

Of course, the Bank of Canada governor is not alone in managing that economy.  With an election scheduled for October, this Canadian economy in recession is about the last thing our Prime Minister needs.   Our federal government is proud of the fact that they brought the country back into surplus, but everything that Stephen Poloz is juggling needs some attention.  You could even argue that we need massive spending from the federal government to stimulate this economy out of the recession.  However, both the Prime Minister and the Bank of Canada governor will not say the R word.

For Canadian agriculture the specter of recession in Canada can be easily overlooked.  In fact, with the lower dollar and the low interest rates it should be good for us.  However, we do not live in a vacuum, we all have families who need jobs and economic activity.  I’m hoping the .5 of 1% works.  A healthy Canadian economy is good for Canadian agriculture.  The challenge will be getting it back there.