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Canadian dollar slumps, and Stephen Poloz talks negative rates: BUSINESS WEEK WRAP


Canada’s plunging currency was a hot topic this week, as the loonie set a new 11-year low seemingly every single day since Monday. 

The reasons why are complex, but they’re very closely tied to the slumping price of oil, which can’t seem to find a bottom.

OPEC is pumping more, the IEA says there’s less demand for all that extra crude, and nobody seems to know where or when oil will hit its floor.

That’s dragging the loonie down, pulling it below 73 cents on Friday to its lowest level since May of 2004, when Paul Martin was prime minister of Canada and “blogging” was Oxford’s word of the year.

So, how low can the loonie go?

Canadian dollar loonie maple leaf

A Canadian dollar coin, commonly known as the “Loonie”, is pictured in this illustration picture taken in Toronto January 23, 2015. The Canadian dollar strengthened against the U.S. dollar on Friday after Canadian CPI data showed an increase in core inflation. REUTERS/Mark Blinch (CANADA – Tags: BUSINESS) – RTR4MOVW (Mark Blinch/Reuters)

“I hate to say it depends,” BMO’s economist Doug Porter told CBC’s The Exchange this week, “but it depends on how low oil prices go.” 

As a rough guide, Porter says, there’s a pretty decent correlation between the loonie and oil in recent years that has found that for every $ 10 decline or gain in oil’s price, the loonie goes up or down by about four cents.

So as soon as we know where oil’s going, we’ll have a clearer sense of where the loonie’s headed. But if oilpatch legend Jim Gray is right and oil could be going as low as $ 30, as he told the CBC’s Peter Armstrong in a fantastic interview this week, the answer may not be pretty, as that would work out to a loonie worth less than 70 cents US.

Ouch. Talk about a swan dive.

Rate talk turns negative

But the loonie wasn’t the only negative storyline in Canadian business news this week. Stephen Poloz grabbed international attention in a speech on Monday in which the central bank governor laid out new policy options in the bank’s toolkit should another financial crisis arise.

Although was quick to make it clear the bank wasn’t considering this drastic option any time soon, one new policy the bank said it would theoretically consider is to let its benchmark interest rate turn negative.

Effectively, that means commercial banks would be charged a nominal fee when they store money in the central bank — a strong disincentive to do so, and an inducement to put that money to work literally anywhere else.

The concept of a “negative interest rate” is a tricky one to wrap one’s head around, but it’s safe to say nobody is going to be paying Canadians to take out a mortgage any time soon, nor should savers expect to be charged for keeping cash in a savings account.

“The average person would probably keep their cash under their mattress,” is how Porter put it in this thoughtful explainer on the story by the CBC’s Justin Li.

The move, in the remote chance it happens, is aimed at banks, to get them to take their savings and put them to work by investing in the economy.

It’s a bold move, but not entirely unprecedented: Sweden, Switzerland, Denmark and even the ECB have all used negative interest rates in recent years in attempts to stimulate their economies.

And again, the bank is nowhere close to using its new tool. “I certainly hope we won’t ever have to use these tools,” Poloz said. “However, in an uncertain world, a central bank has to be prepared for all eventualities.”

Predatory lending crackdown

Another one of the biggest stories of the week was a move in Ontario to better regulate payday lenders and other, alternative financial services.

David Orazietti, Ontario’s Minister of Government and Consumer Services, unveiled new guidelines on Thursday aimed at helping consumers and, as he put it “protecting Ontarians from a cycle of debt.”

While it sounds great in theory, the proposed legislation was short on details. Orazietti says the new legislation would cap the cost of cheque-cashing services, crack down on unfair debt collection, and implement a waiting period between loans for payday lenders, all of which sounds promising. 

But it didn’t touch on one of the fastest growing and most expensive types of loans — instalment loans. There are calls for caps on the ultra high-interest rates. The government says it isn’t ruling it out.

But that, too, is still at least a year or more away from any concrete action

Other stuff

Those were just a few of our best stories this week. Be sure to follow us on Twitter to always stay up to date, and check our our home page for more here.

In the meantime, here’s a day-by-day list of our most-read stories this week.

Monday

Tuesday

Wednesday

Thursday

Friday

CBC | Business News

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