Bank of Canada surprises markets with rate drop

In a surprise move, Canada's central bank, the Bank of Canada, reduced the overnight lending rate by a quarter of a percentage point. The reason given was the threat to the economy of plunging oil prices.

The move by the Bank reduced the lending rate from 1.0 percent to 0.75 percent. The Bank governor Stephen Poloz said: "The drop in oil prices is unambiguously negative for the Canadian economy. Canada's income from oil exports will be reduced, and investment and employment in the energy sector are already being cut." While the overall effect of the drop in oil prices may be negative, the impact will vary from province to province. With its huge oil resources, Alberta will suffer a significant drop in income from royalties and a decline in economic activity in the oil patch, but other provinces with industries that use oil welcome the lower prices for inputs. Consumers, airlines, truckers, and cabbies will be cheering the downward trend in fuel prices.

 The Toronto Stock Market (TSX) was up almost 300 points not long after the announcement. No doubt the reduced rate will be expected to boost consumer demand and help raise the level of economic activity. Almost no economists had been predicting the rate cut at this time but more were suggesting it could happen in the future. 

The rate decrease, follows upon a recent downgrading of both global growth and Canadian growth in the World Economic Outlook for 2015 published by the IMF. The forecast reduced global growth rates by 0.3 percent to 3.5 percent in 2015 and 3.7 percent in 2016. Canada's growth was downgraded 0.1 percent to 2.3 percent for 2015 and even more 0.3 percent for 2016 to just 2.1 percent. The drop in oil prices by about 50 percent since September 2014 was cited as the main reason for the IMF downgrade. In June of last year oil was at $105 US a barrel but now is well below $50 a barrel. The Bank of Canada also downgraded its prediction for Canada's growth in 2015 from 2.4 percent to 2.1 percent even lower than the IMF prediction, although contrary to the IMF, it sees a rise to 2.4 percent in 2016. 

The Bank made its projection on the assumption that oil prices will average about $60 dollars a barrel over the next two years. Derek Burleton, an economist at TD Bank said: "It is a significant move. It does show the Bank of Canada is worried about the big drop in the price of oil ... and what kind of uncertainty that poses in the next few quarters. I don't think they are panicking but I do think they're concerned about some of the uncertainty the recent slump in the price of oil does create for the economy." BMO economist, Michael Gregory, said: "Today’s BoC rate cut smacks of being a one-time 'insurance' move but in his presser, Governor Poloz indicated that if the world changes again (adversely for Canada) the Bank could take out more insurance."  

The Bank predicts that the lower oil and energy prices will reduce inflation at least temporarily but over the projected two year period will again approach the target two percent level. The Canadian dollar, the loonie, is trending much lower. BNN reports: Charles St-Arnaud, senior economist at Nomura Securities International Inc., said the drop in crude will prompt the central bank to lower its growth forecast by 0.5 percent.The loonie depreciated 1.4 percent to $82.55 cents US in Toronto Tuesday, at one point touching its weakest level since April 2009. Nomura forecasts it will reach 80 cents US by the middle of the year. The lower loonie will help Canadian exporters but imports from the US will rise in price and the flow of shoppers across the border may slow considerably as the loonie declines in value against the US dollar.

Canadian 12 year old criticizes Canadian banking system

A video of Victoria's talk at a recent conference of the Public Banking Institute in Philadelphia has been posted on You Tube by her father. Her ideas are no doubt influenced by her father as well.

Her speech is noteworth for the clarity of argument and being simple and straightforward. Grant points out that until the 1970''s the government borrowed money directly from the Bank of Canada. However now the government borrows from private banks and thus has to pay interest to them. Canadian taxpayers are thus having to paying interest on these loans for private banks' profit instead of borrowing directly from our own central bank. The reason for the change is obvious. It provides greater profit for private capital.

Grant's argument is not new. George Crowell writing for the Canadian Centre for Policy Alternatives last year argued that borrowing directly from the central bank “would make available tens of billions of dollars that are urgently needed to rebuild our public infrastructure, protect our environment, and strengthen Medicare and other social programs so vital in meeting human needs.” However it would not provide the banks more profits from interest!

Critics argue that the move would cause inflation as the government would print money whenever it liked. But was there greater inflation before the earlier practice was stopped? Imagine even a Green Party representative comes out for the bank ripoff. Ard Van Leeuwen a Green Party of Canada activist said:"At zero percent interest we would actually be subsidizing, and hence encouraging, government borrowing," So would that not be a good idea to encourage green energy projects? I have included the You Tube speech. See also this article.

Mark Carney: Excessive household debt could threaten economy

Mark Carney Bank of Canada governor said that if excessive household debt threatened the economy he would act. Ten per cent of Canadians could be unable to meet their mortgage payments if interest rates increased to more normal rates says Carney.

Carney remarked:"In exceptional circumstances, if there are issues that threaten financial stability, such as household debt ... the bank could use monetary policy for that purpose," Most economists think that the Bank of Canada will keep interest rates at one per cent for some time yet as the economic recovery remains fragile. However there were good job numbers for the month of March many times the predicted amount. Perhaps this indicates the economic recovery is being sustained. The interest rate at present is far below the inflation rate.

At present household debt is 150 per cent of income. Carney claims this is unsustainable. Carney said:"We have never been as indebted as we are today as individuals," If Carney does decide to raise interest rates this could cause problems for those barely able to pay their mortgages now. See this article for more.