MNI POLICY: Poloz May Leave BOC With 1% Rate Carney Gave Him

--Investors See Cut In April As Virus Leads Economy From "Home"

By Greg Quinn

     OTTAWA (MNI) - Stephen Poloz is poised to retire from the Bank of Canada

with interest rates back at the 1% mark he inherited from Mark Carney, with

COVID-19 forcing a detour from bringing the economy "home" after the global

financial crisis.

     All nine economists surveyed by MNI following Wednesday's 50bp cut to 1.25%

say Poloz will move again by the next meeting on Apr. 15, likely to 1%. The

Governor in a speech Thursday reiterated he's prepared to act again depending

how COVID-19 risks evolve.

     "My sense of home is that we've been in the neighborhood of home for about

two years now," Poloz said at a press conference after the speech. "It's clear

to me that we have the makings of a new detour here."

     The Governor often says every decision is a clean sheet and investors

should draw their own conclusions from data rather than code words. Yet

Thursday's speech offered this echo of Wednesday's decision: "Governing Council

stands ready to adjust monetary policy further if required."

     The drag no one saw coming this year was coronavirus. Most economists

through late last week said the BOC would hold rates on March 4, until a market

swoon brought a wave of calls for cuts of 25-50bps. Poloz said at the press

conference that moving decisively now has a better chance of sustaining

confidence.

     "It is requiring us in the policy space to take a bit of a detour, and so

it will be our job to do everything that's in our control, to use our tools, to

get the economy back on track, to get back home as quickly as possible," he

said.

     --LOWER BOUND

     Laurentian Bank Securities chief economist and former BOC researcher

Sebastien Lavoie says that "under the extreme severe scenario of a broader

contagion resulting in a global economic meltdown, the BoC may have to bring

down its policy rate at the zero lower bound."

     "An easing cycle usually never ends with a 50bps cut, regardless of the

context," Lavoie told MNI. "We are tempted to call for at least a 25bps BoC cut

on Apr. 15."

     The short-term economic impact of the epidemic is likely to be felt in

March/April in North America, he said.

     The BOC's 50bp cut came a day after an emergency G7 conference call and the

Fed going alone with a 50bp cut. The question now is whether Poloz's successor

will face a bigger challenge with less room to cut if the virus worsens.

     Poloz's term expires June 2 and the BOC has a decision the next day.

Typically policy makers have discussions on rates for more than a week before a

decision is announced.

     After beginning his term on Jun. 3, 2013, Poloz extended one of the longest

pauses since World War II before cutting rates twice to 0.5% in 2015 to get

ahead of a collapse in exported energy prices. Canada's debt-fueled consumer

spending later carried the economy and the BOC raised rates to 1.75% in 2018 as

full output seemed near.

     But it proved elusive. Weakness in oil and gas investment and chronic trade

deficits led the BOC to back off further tightening, though Poloz last year was

able to cite resilient domestic spending as he resisted the biggest wave of

global rate cuts since the financial crisis.

     The BOC shifted gears in January, saying the door was open to a rate cut on

signs domestic spending faltered in the fourth quarter. The bank's 0.3% forecast

matched what Statistics Canada reported at the end of February. The Governor has

often credited a strong staff when asked how he and the BOC saw the 2015

slowdown and made other solid predictions, and said Thursday there was a bias to

ease even before the virus outbreak.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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