Sept. 13, 2011 – “Yikes, says Bank of Canada” – that headline in the September 8 Montreal Gazette may not have been an exact quote, but it certainly caught the mood.
The story by Jay Bryan of the Gazette that ran under the headline demonstrated why the “Yikes” is appropriate.
It describes the Bank of Canada’s rationale for deciding to keep its interest rate at one per cent and why an increase in that very low rate is not in the offing.
“In the light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished,” the bank said.
In other words the Canadian economy is being hit by the dreadful news out of Europe, a stagnant U.S. economy and a global economy that is starting to look much like it did in 2008.
In the face of all this bad news Bank of Canada governor Mark Carney seemingly decided there is little risk of inflation and a definite need to continue to use the monetary tools at his disposal to try to stimulate the economy.
In theory, low interest rates should lower the risk of borrowing and encourage people and companies to spend. In reality, Carney, like central bankers in Europe and the United States may be pushing on a string.
The reason lies in the most significant word in the Bank of Canada’s statement “uncertainty.” You can measure risk, you can plan for it, you can insure against it. Uncertainty is a completely different beast. There is little if anything to measure, planning could be futile and there is no way to insure against it.
A strained example could go like this. You sense that disaster is coming but you don’t know what kind. You prepare for a tornado and get hit by an earthquake or perhaps a meteorite.
For the last year or so it was thought that Canada was slowly recovering from the recent recession. The unemployment rate was falling, consumer and corporate debt was coming down and confidence seemed to be recovering. But in August, consumer and small business confidence fell to two-year lows.
Add to that the results of a recent survey that showed a majority of Canadian employees are living paycheque to paycheque and say they would be in financial trouble if they went just a week without pay.
With people worried about their job security and companies concerned about future sales and profits, uncertainty – not risk – rules. In that situation “yikes” seems an all too accurate description.
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