The Bank of Canada (BoC) has decided to cut its key interest rate by 0.25% to 2.25%. Major Canadian Financial Institutions will follow suit and lower their Prime interest rates to 4.45%.
This note comes on the day that NVIDIA tops $5 trillion in market cap value at $201 per share. This may be representative of how well the US economy may be doing if you are an optimist. This is contrary to the fact that yesterday was the worst day for market breadth on an overall “up day” since 1994. 400 of the S&P 500 stocks were down vs. 100 being up in value. This points to an increasingly selective market where people are becoming focused on a smaller number of stocks. Breadth of market values increasing would be a much healthier investment & economic environment. Further, 72% of US CPI components are trending at higher than the 2% target CPI rate, and this is increasing.
It is a tricky environment for central banks to make key interest rate decisions.
The BoC is citing “excess capacity” (factories and people) continuing as part of its justification for lowering its rate. Canada has a more challenging time than the US Federal Reserve because of its current lagging economy from the ongoing self-inflicted “death by a thousand cuts” compared to the US. While inflation is not completely out of line, unemployment hovers over 7% and housing prices remain at higher-than-ever prices, while GDP growth remains exceptionally low at about 1%.
Canada’s economic problems can easily be fixed with appropriate policy and quick action by the federal government:
1.) Continuing to stall on policy that stifles energy development in Alberta,
2.) an “elbows up” approach to the US trade concerns,
3.) and not addressing Canada’s decade-long productivity problems with widespread tax reductions and deregulation,
will just continue to impair the Canadian economy. The private sector is saying, “I don’t think that this is a good time to invest in the Canadian economy.”
In viewing the BoC’s press conference today, it was evident that they appear to be covering for the federal government’s poor fiscal policy and focusing on the “red herring” of US trade tariffs, which affect only 20% of the trade between the US and Canada, and are only temporary until Canada decides to make negotiations with the US a priority. Meanwhile, the US is getting oil & gas from Canada at rock bottom discounted prices instead of world market prices!
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