Lower Rates May Do More Harm Than Good
World Economy

Lower Rates May Do More Harm Than Good

The head of Canada’s largest exporters association has a message for Bank of Canada Governor Stephen Poloz: don’t do us any favors.
Speculation Poloz will cut interest rates again as early as Wednesday is fueling the Canadian dollar’s precipitous fall and may be doing more harm than good, says Jayson Myers, chief executive of Canadian Manufacturers & Exporters. Exchange rate volatility is putting a chill on business decisions and renewed talk of lower rates is stoking worries about the economy’s health, all of which is bad for confidence, he said, Bloomberg reported.
“My advice right now would be to even take a look at increasing interest rates by a quarter of a point,” Myers said by telephone. “Interest rates are low already. A little bit of dollar stability would be better.”
If Poloz can’t even get exporters to support a rate cut, he’s got a serious buy-in problem. Myers isn’t the only one flagging the shrinking benefits and mounting costs of additional monetary easing. Last week, two bank chief executives warned lower rates would hurt their margins.
That’s on top of a growing chorus of economists and investors warning historically low rates are distorting the economy by stoking an already hot housing market and will do nothing to help embattled oil producers. There’s also the argument a rush to the currency bottom only rewards marginal companies and will turn Canada into a low-wage producer of manufactured goods servicing the US economy.
With the currency caving to fresh 13-year lows against the US dollar, consumers are meanwhile seeing their purchasing power evaporate.
Policy makers have already cut rates and “it doesn’t seem to matter to them that has very little effect,” said Jeff Herold, chief executive officer at J. Zechner Associates Inc., which manages about C$2 billion ($1.4 billion). “He has impoverished Canadians.”

 Loonie Depreciation
Of 32 economists in a Bloomberg survey, 14 (62%) forecast a cut on Wednesday, while 18 say no change. The loonie has depreciated 11.5% in the past three months, marching lower with crude oil prices. It’s down 29% since Poloz took the helm at the central bank in June 2013. Government bond yields reached record lows last week, heightening the sense of concern.
Swaps traders have fully priced in at least one rate cut by April, and a more than 50% chance of a second by the end of this year. They’re even placing a one-in-ten chance the benchmark rate will be negative 0.25% by December. A month ago, the chances of even one rate cut for all of 2016 were below 50%.
It’s not like the economy is all doom and gloom. There is growth, albeit slow, with indications non-energy exporters are responding to a strengthening US economy and weaker currency. Another rate decision is less than two months away; by then the central bank will have more information, including details on what the federal government plans to do in its 2016 budget.


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