Bank of Canada's shock move marks clear break with Carney era

Fri Jan 23, 2015 1:10am EST
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By Randall Palmer

OTTAWA (Reuters) - Bank of Canada Governor Stephen Poloz's shock rate cut on Wednesday sent a clear message to financial markets: Don't expect me to hold your hand.

Trading floors reacted by selling the Canadian dollar and uttering more than the usual number of expletives, but the move drove home that the central bank has changed its views about a monetary policy tool used by Poloz's predecessor Mark Carney, who's now Governor of the Bank of England.

Since taking control of the central bank in 2013, Poloz has opted for a combination of folksiness - comparing the economy to bubbling spaghetti sauce and the currency to a dog on a leash - with traditional central bank ambiguity.

This was a contrast to Carney's efforts to set explicit guidelines on where interest rates are headed.

"The fact that there was zero signaling ahead of it, and there was zero people expecting it because there was zero signaling, was quite odd for any central bank really," said Greg Moore, senior currency strategist at RBC Capital Markets.

Some market participants say the rationale for the cut is understandable given oil's steep descent. Poloz made clear in October he wasn't in favor of providing explicit guidance to markets, when he abandoned a policy of indicating where rates were headed.

He told Reuters then that telegraphing an imminent change in interest rates would not be necessary "because the market will know."

On Wednesday, Poloz said the ingredients were out there for the market to see a cut was coming. But market participants taken by surprise beg to differ.   Continued...

Bank of Canada Governor Stephen Poloz takes part in a news conference upon the release of the Monetary Policy Report in Ottawa January 21, 2015. REUTERS/Chris Wattie