Get Used to It, Fidelity Says of Bank of Canada Shocker

Bank of Canada Governor Stephen Poloz told investors last year he would soon start surprising them because he was no longer offering guidance on future interest rates. Today he delivered.

Poloz’s surprise interest-rate cut, following Switzerland’s shock move last week and easing by Denmark and Norway, is prompting a reevaluation on trading desks of central bankers as predictable, cautious and slow to act.

“If people are waiting for the bank to spoon feed them rather than doing the analysis, this is what they get,” said David Wolf, who oversees more than C$7.5 billion ($6 billion) of funds at Fidelity Investments in Toronto, and correctly forecast this month that the bank’s next move would be a cut.

The Bank of Canada today became the first central bank in the Group of Seven to cut interest rates in response to plummeting oil prices, saying the shock will weigh on everything from inflation to business spending. The quarter-point move to 0.75 percent ends a four-year pause in interest rates and caught the markets unprepared.

The nation’s currency depreciated more than 2 cents against its U.S. counterpart and was quoted at 1.2368 per U.S. dollar at 11:33 a.m. in New York, the biggest one-day drop in almost five years. Two-year bond yields plunged 29 basis points to as low as 0.55 percent. Stocks surged 1.9 percent in Toronto.

Swiss Move

Canada, the largest exporter of oil to the U.S., is loosening monetary policy as a 56 percent plunge in oil prices since June raises the risk of deflation globally. The Danish central bank cut its key rate on Jan. 19. And in the biggest surprise, Switzerland’s central bank scrapped its currency cap, sending the franc surging as much as 41 percent against the euro last week.

“Central banks are acting in their own interests,” Aubrey Basdeo, head of Canadian fixed-income at BlackRock Inc., the world’s biggest money manager, said by phone from Toronto. “That will lead to increased volatility which will be a constant going forward.”

Wolf, a former Bank of Canada adviser, has held an underweight allocation in Canadian assets for a year because he saw the nation’s currency as overvalued, exports stifled with stubbornly low inflation.


“There’s a long history of market participants being wrong-footed and complaining they weren’t given guidance they felt they were entitled to,” he said. “In this case, the macro consequences to what the Bank cares about -- the inflationary outlook -- were quite directionally clear.”

Poloz, who took over from Mark Carney as Bank of Canada governor in June 2013, inherited his bias towards higher interest rates. In October, he signalled he was abandoning forward guidance, publishing a paper saying it was best utilized when policy rates are at zero.

Poloz said he didn’t want investors to become addicted to his clues over changes in the economy. The plunge in oil prices were a clear signal that a rate cut was possible, Poloz told reporters in Ottawa today, adding his preference wasn’t to surprise markets. The risks of deep damage to the Group of Seven’s biggest crude exporter were also too big to delay action, he said. He added that if oil prices continue to fall, more “insurance” or stimulus, may be needed.

“We discussed the risk that by moving today we would surprise financial markets,” Poloz said. “We took comfort from the observation that the consequences of the drop in oil prices appear to be well understood, and that the possibility of a rate cut had begun to enter markets in the last couple of weeks.”

For related news: Denmark Says It Has Tools to Defend Peg After Surprise Cut

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