The Canadian-European central bank double bill

Jan. 22: A Bank of Canada rate-cut, plus, a massive quantitative easing program for the eurozone

It’s on days like this when the Playbook basically writes itself. The major stories today are both at home in Canada and in Europe, as the analysis continues for the Bank of Canada’s surprise rate-cut yesterday, as the European Central Bank announces long-awaited qualitative easing.

First, a look at some of the commentary from the Bank’s announcement, including from the Maclean’s economic panel, and then a look at the European Central Bank’s meeting (updated.)

The Bank of Japan also made its monetary policy announcement today after a two-day meeting, and real GDP numbers (by industry) will be out for the U.S. this morning. Plus, the World Economic Forum continues today, and you can prep with Scott Gilmore’s take on the big debates, discussions, and of course, parties.

Surprise, surprise! By now you know that the Bank of Canada cut its interest rate by a quarter of a per cent to 0.75 per cent – the first change since September 2010, when the rate was set at one per cent – and, by all accounts, a fairly massive surprise. Yesterday, the discussion was mainly over expectations that a rate hike would be pushed back as the true impact of oil’s fall becomes clearer, but the Bank had something else in mind, as governor Stephen Poloz declared the drop in oil prices is “unambiguously negative for the Canadian economy.”

The drop clearly indicates the Canadian economy is probably in for a rougher ride than expected, but it leaves all kinds of other questions. Just last year, Poloz said some of the greatest risks to the economy were a housing market that might be overvalued by as much as 30 per cent, and unsustainable rates of household debt. If this drop is expected to cushion the impact of the oil rout, especially on western Canada, it’s not clear how it could impact the housing market, especially in Toronto and Vancouver, where prices are still hot, hot, hot (in Calgary … not so much). It’s a continuing tale of the “two economies” – the oil economy and the manufacturing economy (or, if you like, Alberta vs. Ontario). As Maclean’s John Geddes says, the political implications are huge. If we’ve seen an unbalanced picture across the global economy –the U.S. vs. the rest, for one – it shows that Canada is certainly not immune. The move had an immediate affect, with the loonie dropping a cent and a half by closing, and the TSX/S&P Composite Index getting a boost of more than 250 points.

There’s lots to read on this – for your first stop, head over to a Storify chat of Maclean’s economics panel, which includes Mark Brown (managing editor of Canadian Business), Romana King (senior editor at MoneySense), and economists from Western University and the University of Alberta. Among other things, you’ll get some good insight into how this will affect your finances.

What does this mean for Australia? No, really. As the FT points out, after the Bank of Canada announced their cut yesterday, the Australian dollar dropped by more than one per cent – and there’s a connection. Canada and Australia, after all, are kind of the same place, if you just replace snow with year-long sunshine, and both have had commodity economies battered in recent events: here, the price of oil, down under, the prices for metals. The majority of analysts don’t think a rate cut is imminent from the Reserve Bank of Australia – but ahem, surprises happen – and the question was last on the table in December, as Oz contemplated the impact of falling demand from China and slowing inflation.

Go-time for the “quantitative easing bazooka” (update below.) Today’s the day, after months of speculation on whether Mario Draghi and the European Central Bank (ECB) will kickstart a massive bond-buying program to stimulate the eurozone economy.  The general prediction is that the ECB will announce 550 billion euros worth of stimulus (almost $790 billion Canadian), purchasing bonds at a set amount every month. Also watch for whether the ECB will set a target for when QE could stop – the U.S. and the U.K. both set inflation targets for their stimulus plans. Besides the debates about whether QE will even begin, and how much, there are questions about how the risks would be shared, as well as uneven enthusiasm among national central banks – Germany has been particularly reluctant.
Another concern is whether all the speculation over QE could be a risk in and of itself. At the FT, John Authers notes that a build-up comes with a risk that the policy won’t pack the desired punch. Central banks know this, and have often been strategic in surprising markets – from the Bank of Canada’s announcement this week, to the Swiss Central Bank’s currency surprise last week. Then, there’s the greater question of whether QE is too little, too late. But let’s save that one for tomorrow.

Update: The ECB unleashed a surprise of its own this morning, when it announced a quantitative easing program that was even bigger than expected – at a rate of 60 billion euros a month (about $86 billion Canadian.) Mario Draghi said the program would begin in March and continue until September 2016, or whenever inflation hits the two per cent target (whichever comes first.) The move prompted a big jump in European markets, even as the euro fell to another 11-year low and bond yields fell. We’ll have a more in-depth look tomorrow.

A big bill for Target. The American retailer is facing billions of dollars in debt as it prepares to wind-down its stores in Canada, which will require laying off more than 17,500 employees. The chain owes the Canada Revenue Agency more than $12 million, and owes millions to various suppliers including Warner Bros., Starbucks and Sobeys. For Maclean’s, Chris Sorensen dissects the roll-back in light of signs of a slumping Canadian economy, noting: “What’s surprising about Target’s Canadian misadventure isn’t that it ran into unforeseen problems. It’s that it didn’t think there was any point in trying to fix them.”

Deflation-weary Japan downgrades their inflation target. In other Central Bank news, Japan released a fairly optimistic monetary report this morning – but acknowledged inflation isn’t going to hit the two per cent target any time soon. Japanese PM Shinzo Abe has based his “Abenomics” on beating long-running deflation, but since slowing prices seem to be a global trend, he’s not been having much success. Nonetheless, the Bank has left their quantitative easing targets (set almost two years ago) as is, and have expanded incentives for domestic banks to lend.

Need to know
TSX: 14,560.42 (+ 251.98 points), Wednesday
Loonie: 81.07 cents (- 1.53 cents), Wednesday
Oil (WTI): $47.92, Thursday morning

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