Only two days after the Bank of Canada announced that the economy wouldcontract by 3% instead of the forecast of 1.2 % in January and afterit cut rates to 25 basis points then promised to keep them there for ayear, the BoC made no commitment on the use of quantitative easing tostimulate the Canadian economy.
Only two days after the Bank of Canada announced that the economy would contract by 3% instead of the forecast of 1.2 % in January and after it cut rates to 25 basis points then promised to keep them there for a year, the BoC made no commitment on the use of quantitative easing to stimulate the Canadian economy.
Many investors had expected the quantitative easing to begin as early as today as recent reports over the past few weeks had indicated the economy was weakening. Furthermore, the BoC may have baited traders into believing that some form of non-standard stimulus would be announced on April 23. Instead the BoC opted to take a wait-and-see attitude to allow monetary policy to take its course. It now seems that they want to see the effect the last rate cut will have on the economy before taking further action at its next meeting on June 4.
Canadian Dollar short sellers were caught by surprise following today’s announcement as many had initiated positions in anticipation of quantitative easing. Much of the rally was attributed to short covering rather than new buying. The language of the announcement does not totally eliminate a financial stimulus plan but merely seeks to postpone it,
By allowing the last 25 basis point cut to work its way through the economy, some say the BoC probably made the right decision as they have had no experience in the risky business of quantitative easing which is basically the printing of money. If the BoC overshoots its target then serious inflation problems could arise.
The BoC says it is now willing to wait until June 4 to allow the economy to show signs of recovery. If the economy worsens by then, look for the BoC to get aggressive. The USD CAD is likely to trade sideways-to-lower until the June date but losses may be limited to the downside because there are no indications that a bottom in the Canadian economy has formed yet.
The problem with the BoC plan is there is no plan. Their hesitation in providing stimulus to the economy could backfire like it has for the European Central Bank when they hesitated in cutting interest rates. It should have followed the lead of the United States and the United Kingdom, both of which have cut rates and applied quantitative. This delay in stimulus could prove to trigger more serious economic problems within the next month.