Back to the '50s for the Bank of Canada

The Bank of Canada announced this morning a 75bp cut to its overnight target rate, dropping the level to 1.50%, the lowest since 1958.

The extent to which many central banks keep cutting their policy interest rates has to date overwhelmed what even the most bearish economic observers anticipated even just 3 months ago, never mind a year ago.

I've done pretty well this year managing my money market portfolios by staying consistently long (max long, as far as my mandates would allow, for the vast majority of the time), but I've got to admit, I didn't see this coming.

If one held the view that this economic environment would deteriorate to worse levels than recent previous recessionary periods (early '80s, '90s and '00s), it was not hard to envision that monetary policy would need to be at least as stimulative now as in those cycles. So its not terribly surprising that the Bank dropped its rate to below the past cycles' lows of 2.00%. The surprising thing is that the job is likely not yet done.

After today's statement from the Bank, it would no longer be surprising if the Bank took out the historical low of 1.12% set in the '50s by cutting at its next scheduled meeting on January 20th by another 50bps to 1.00%. The statement, which uses language like "deteriorated significantly" (i.e. the world economy), "broader and deeper" (i.e. the coming global recession) and "severely strained" (i.e. the global financial markets), and the absence of any mention of two-sided inflation risks (although there is some acknowledgement of countervailing factors, including the amount of monetary medicine injected into the patient to date, as well as the depreciation of the C$, which will help offset some of the effects of plunging commodity prices and falling global demand for our exports), is quite dovish. And the forward-looking policy bias remains toward further easing, with the extent of such extra stimulus being data-dependent.

In other words, as much as the Bank would surely like for its job to be done, it seems that its actions will be determined by the evolution of the economic outlook, and on that front, there seems little reason for optimism just yet. Will the Bank at some point go on hold to see how well its actions to date are acting? Surely, yes. But it seems clear now that if 2% and 1.5% weren't going to be viewed by the Bank as lower bounds, then there's little reason to expect 1% to either.

Look out below, as the only lower bound that will truly stand in the Bank's way is 0!