Volatility and the Bank of Canada
(and possibly other central banks to follow)
I have been pounding the table on volatility a fair bit in this blog in the last while and my theme has been that central bankers do not like volatility.
In a speech in London, England to the Canada - United Kingdom Chamber of Commerce on Thursday, BOC governor Poloz addressed that very topic:
Certainly central bankers did not like the extreme volatility brought on by the 2008 financial crisis and the subsequent "after-shocks" of volatility that have followed the Great Recession.
Historically low interest rates (ordinary monetary policy tools) and Quantitative Easing (extraordinary monetary policy tools) have been utilized on a global scale to fight of deflationary pressures that threatened the global economy.
In most cases, central bank mandates are to promote "price stability", which for all intents and purposes is an inflation rate of 2%. (the US Federal reserve has a dual mandate of achieving price stability and maximum employment).
What does this all mean to us?
- If there is economic growth, there is likely to be inflation of some degree.
- We all desire economic growth because it allows us to improve our standard of living:
- greater likelihood of employment = potentially better income.
- In other words, a little inflation is a good thing.
- Too much inflation erodes purchasing power and is counter-productive.
- low inflation, disinflation and deflation are all symptoms of a weak economy and nobody wants that (except the doom and gloom types).
To get economic growth, individuals and businesses need to be confident that the future will hold the potential for higher incomes and growing earnings.
As I have repeatedly mentioned (like the proverbial broken record), central banks have been trying to turn the tide of non-confidence with their aggressive (extraordinary) monetary policies.
They want to start to "wean" us off of our expectations that they will be there to hold our hands through the inevitable volatility that may arise as they begin to "normalize" interest rates.
That is what Governor Poloz was talking about on Thursday.
It is time to "take the punch bowl away from the party" and that as a result we should anticipate higher levels of volatility in financial markets. We need to adjust our expectations.
So prepare yourselves, as I have suggested so many times before, for a bumpy ride. For the short-term, this may provide lower than hoped for portfolio returns. Certainly lower than what we have been experiencing over the last few years and quite possibly, lower than the long-term averages.
Repeat after me....
And so on and so on.....
The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund