Poloz Gets No Relief From Trudeau in Infrastructure Plan

  • Government opts against short-term fiscal boost in fall update
  • Economist now sees odds tilting toward further monetary easing

Canada’s stimulus ball is back in Stephen Poloz’s court.

Finance Minister Bill Morneau’s fiscal update Tuesday provided no new immediate spending measures, potentially leaving the central bank governor alone in combating any further weakening of Canada’s economy.

Poloz has touted the need for a better mix between monetary and fiscal policy, and fresh government spending could have relieved some of the pressure for another interest-rate cut from the Bank of Canada.

“From a monetary policy perspective, this tilts the odds in favor of further monetary easing, though we still consider this to be a tail risk at this time,” Jean-Francois Perrault, chief economist at Bank of Nova Scotia and a former top finance department official, said in a note to investors. “Given this, there could be additional downward pressure on the Canadian dollar as markets digest” the fiscal update’s implications on interest rates.

The loonie was one of the worst performers Wednesday among the 16 most-traded currencies tracked by Bloomberg, and was little changed at C$1.3380 versus its U.S. counterpart at 9:33 a.m. Toronto time.

Swaps traders haven’t significantly increased bets on further central bank easing, now pricing in about 9 basis points of cuts by the end of 2017, compared with 8 basis points earlier this week.

Cumulative Deficits

“Markets recognize that the bar to a rate cut is high,” Andrew Kelvin, senior rates strategist at TD Securities, said in an e-mail. “Thus far, data has met the Bank of Canada’s expectations.”

Morneau’s plan showed cumulative deficits over the next five years that are little changed from his March budget thanks to the elimination of a contingency risk cushion. He also unveiled C$81.2 billion ($60.8 billion) in new infrastructure spending over the coming 12 years, with only C$8.9 billion due before the next scheduled election in 2019. The Liberal government, under Prime Minister Justin Trudeau, was elected on a promise of modest deficit spending that held or gradually reduced the country’s overall debt as a share of gross domestic product.

Easing Bias

Poloz told reporters last month the Bank of Canada refrained from cutting rates in part to gauge the impact of fiscal spending measures. In its Oct. 19 Monetary Policy Report, the bank reduced forecasts for Canadian exports and output. On the plus side, it said the government’s earlier fiscal stimulus should provide a 1 percent boost to GDP by early 2018.

The central-bank governor was even blunter about how much room the government still has to spend. Asked about the dangers of large deficits in an Oct. 23 television interview, Poloz said there’s “a balance somewhere, but I can tell you that I think we’re pretty far away from that balance point,” and that “Canada is in a very good fiscal situation, so we shouldn’t be worrying about that at this time.”

The lack of new money in Tuesday’s fiscal update is “very disappointing, meaning that there is no new stimulus for the next year and a half,” according to Charles St-Arnaud, senior economist at Nomura Securities International in London, who has also worked in Canada’s finance department and central bank.

Poloz had spent a lot of communications capital since Trudeau’s election crediting the government for its plan to spur growth through deficit spending. The bank has also praised the finance minister’s recent moves to curb froth in the housing market.

Tool Kit

Poloz, in a Vancouver speech hours before Morneau’s fiscal update, said the central bank has more freedom to focus on hitting its inflation target after the federal government took steps to curb housing excesses. He also kept alive the idea that monetary policy could go beyond just a rate cut if the economy really needs it.

“There are unconventional monetary policies that give us more room to maneuver than previously believed,” Poloz said. “These include pushing interest rates below zero or buying longer-term bonds to compress long-term yields.”

The central banker said two weeks ago that policy makers “actively discussed the possibility of adding more monetary stimulus” last month but decided to wait to assess risks from, among other things, “the impacts of the federal government’s fiscal measures, which are just beginning to be felt.”

Yet while the government’s new infrastructure investments are at first glance impressive, the near-term impact is less so, according to TD’s Kelvin. He told clients Tuesday that most of the new spending is heavily back-loaded, with only C$700 million slotted in for 2017-18 and nothing for the current fiscal year.

“Given the long lag times associated with infrastructure spending, the newly announced measures will not do much to alter the trajectory on the Canadian economy,” Kelvin wrote.

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