Exporters to Bank of Canada: Thanks, But No Thanks on Rate Cut

  • Jayson Myers says lower rates may do more harm than good
  • Swaps trading shows 62% chance Poloz will cut on Wednesday

Canadian Dollar Extends Longest Losing Streak

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.

“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.

Hot Housing

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 U.S. economy.

With the currency caving to fresh 13-year lows against the U.S. 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.”

Of 32 economists in a Bloomberg survey, 14 forecast a cut on Wednesday, while 18 say no change. Bank of Canada officials declined to comment on this story when contacted by Bloomberg.

The loonie has depreciated 11.5 percent in the past three months, marching lower with crude oil prices. It’s down 29 percent 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.

Erik Hertzberg/Bloomberg

Swaps traders have fully priced in at least one rate cut by April, and a more than 50 percent 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 percent by December. A month ago, the chances of even one rate cut for all of 2016 were below 50 percent.

“As a central banker you have to say at some point, ‘I have to give the exchange rate adjustment time to work through as there’s a lot of Canadian dollar stimulus in the system already,”’ said Andrew Spence, head of liquid alternatives at Scotia Institutional Asset Management and an adviser to former Bank of Canada Governor David Dodge in 2002, coincidentally the year the Canadian dollar reached 62 U.S. cents, the lowest ever.

Safety Valve

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 U.S. 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.

Poloz lowered the overnight rate twice last year, in January and July, saying the oil shock required a safety valve and lower borrowing costs would help manufacturers pick up the slack. His message lately has been even with interest rates at 0.5 percent, the central bank can go lower if necessary. The financial system could handle rates as low as negative 0.5 percent, and the central bank could also deploy quantitative easing, Poloz said in a Dec. 8 speech.

Up to now, Poloz hasn’t had much choice, being the only game in town, with the previous government politically committed to balancing the budget and reducing spending. Calls are growing louder for the federal government to shoulder more of the stimulus burden by boosting spending.

Deficit Spending

Prime Minister Justin Trudeau won elections in October partly on plans to run deficits to spur growth over the next three years, but that spending will have only a marginal impact on the economy, especially given the Liberals are sticking to a pledge to return the budget to balance in four years.

Poloz also disputes his intention is to weaken the currency, claiming falling oil prices are almost wholly responsible for the depreciation.

Yet, with interest rates already at record lows, it’s hard to argue a rate cut is aimed at anything less than a weaker currency, said Scotiabank’s Spence.

“There is a lot of stimulus in the system from the exchange rate already, so what would an additional interest rate reduction achieve?” Spence said. “More exchange rate depreciation primarily, and it could encourage a Canadian dollar overshoot.”

Further dollar weakness won’t be seamless.

A weaker dollar isn’t unambiguously good for the nation’s economy, even for exporters because of the volatility and rising costs for imports. That’s important for an economy such as Canada’s which is more import-dependent than most of its industrialized peers.

How muddy is the picture? Ontario, the manufacturing heavy province seen as the big beneficiary of a weaker dollar, also makes up about 60 percent of the nation’s imports, well above its share of the economy.

A weaker currency is also sure to become a major political issue. Canadians tend to notice when their buying power shrinks relative to their U.S. cousins, especially given 90 percent of the population lives within 100 kilometers (60 miles) of the U.S. border.

As the currency was hitting record lows back in January 2002, then Finance Minister Paul Martin and the Bank of Canada’s Dodge spent the month trying to alter perceptions of the currency, including a trip to New York, arguing the weaker dollar was hurting the chances of a recovery.

The depreciation represented “a pay cut to every Canadian, a drop in our standard of living and a reflection of the fact that Canadians are getting poorer as Americans are getting richer under the watch of the government,” said one lawmaker in 2002 critical of then Finance Minister Paul Martin’s handling of the economy. Who was that? Treasury Board President Scott Brison, now a key cabinet minister and top economic aide to Trudeau.

Plus, there are the confidence issues.

“Cutting interest rates at this point’s mostly about weakening the exchange
rate to help exports, and there the hazard is the exchange rate is already
weakening on its own,” said Avery Shenfeld, chief economist at CIBC World Markets. “There is a risk of setting off too quick a reduction in the exchange rate that hurts consumer confidence.”

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