The Bank of Canada is set to meet next Tuesday, March 4 to set its new interest rate policy. Most analysts expect the key policy-setting rate (i.e., the overnight rate) will be dropped by 50 basis points from 4.00% to 3.50% (100 basis points = 1.00%). The current level at 4.00% is a full percentage point higher than the U.S. federal funds rate of 3.00%.

Mark Carney has just taken over from David Dodge as Governor of the Bank of Canada and I wonder if there might not be another dynamic at work.

I’m guessing that Mr. Carney is thinking about lowering the overnight rate by 100 basis points. Many economists would argue against this all-at-once move because it would reduce options in the future and might provide too much stimulus.

At the same time, the consensus is that the rate will move to 3.00% by the summer anyway. In the meantime, the Canadian dollar has climbed above parity with the U.S. dollar again and more manufacturing jobs are being lost. It is also true that this is a particularly fortunate time for Canada in that inflation remains well under control.

Mr. Carney is a relatively young man, in his 40s. A bold quick rate cut of 100 basis points may be just the ticket to mark his new career move.

Caveat: Bankers don’t rise to the top by wearing Hawaiian shirts rather than more conservative attire. We’ll know the answer soon enough.

Alex Carrick

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