Bank of Canada seen pushing on a string with rate cuts

Fri Jul 17, 2015 1:07am EDT
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By Andrea Hopkins

TORONTO (Reuters) - The Bank of Canada has more than a credibility problem. It also has an effectiveness problem. With interest rates already at record lows, Wednesday's interest rate cut or any further easing will have little impact given borrowers are already leveraged to the hilt.

And much like his peers in industrial economies around the world, Governor Stephen Poloz has few tools left in his kit.

After weathering a global malaise better than most countries, Canada is now teetering on the brink of a recession, sideswiped by a long plunge in oil prices and a long wait for main trading partners to start buying Canadian exports again.

"So much of this depends on events outside of Canada, and is inherently unpredictable, (that) it makes the Bank of Canada look bad. It makes the Bank of Canada seem ineffective. And the fact is, they are ineffective," said Sherry Cooper, chief economist at Dominion Lending Centres.

Poloz took pains on Wednesday to assure Canadians the central bank still had plenty of ammunition after it cut the benchmark rate by quarter point to 0.50 percent. Economists say, however, most of the options offer diminishing returns and little bang for the buck.

"There is a phrase, 'pushing on a string,'" said Hilliard MacBeth, a portfolio manager at RichardsonGMP in Edmonton.

"You get to the point where the Bank of Canada tries to cut rates and put more money in the system, but at the other end of the funnel, people have to be willing and able to borrow ... and a lot of people are at the maximum they can qualify for. It doesn't matter how low rates go at that point."

The Bank can cut rates a bit further, taking them closer to zero. But with the United States heading for tightening, such a move will hammer the Canadian dollar. That is good for exports, but more expensive imports hurt the same consumers Poloz wants to encourage.   Continued...

Bank of Canada Governor Stephen Poloz takes part in a news conference upon the release of the Monetary Policy Report in Ottawa, Canada July 15, 2015. REUTERS/Chris Wattie