It’s tough being a Canadian economist these days, eh? The experts said that it was an absolute certainty that interest rates would be increasing in the Canadian market…right up until the Bank of Canada decided to cut them instead.
Surprised? Absolutely. Prepared? Most Nomis clients are, actually.
It’s really not about whether rates go up or down. It is about the speed with which your institution reacts to the changes. Right now, pricing committees all over Canada are meeting to discuss the impact of the 25 bps rate cut on their 2015 goals and objectives. The ones who get it right, and do so quickly, will come out on top.
Here are three things to consider about the BoC’s policy move:
Out-of-cycle vs. in-cycle policy adjustments
This rate reduction was out of cycle and entirely reflective of the current price of oil, which has created increased downside risks to both inflation and financial stability. The rate change is simply insurance against those risks. While it is unlikely that oil prices will plunge much lower, the BoC has a history of making multiple reductions to the overnight rate. If another reduction occurs, it will be an in-cycle adjustment and likely to come within the next few policy meetings. Those who have in place a contingency plan for this further reduction will be well positioned to take advantage when the time comes. Adjusting bank forecasts is never an easy option, but adjusting the bank’s strategy for achieving those forecasts is.
The timing could have been better, but it also could have been a lot worse
From a bank perspective, the best time for a rate reduction would be late in their 4th quarter. That means little to no impact on current fiscal budgets, and more than enough time to adjust the targets for the coming fiscal year. As the saying goes, if wishes were horses, beggars would ride. Most Canadian financial institutions are just about to start their 2nd quarter, which means that targets have been agreed to, are being worked towards, and very likely won’t be adjusted. The good news is that there is still enough time to assess the impact of the policy change and adjust their pricing strategy. Speed is key, accuracy is non-negotiable.
Knowing the price sensitivity of your portfolio is key to hitting your forecasts
Not all price changes are equal. There are many areas of a financial institution’s rate sheet that will see changes that at least equal the rate cut we have just seen, but there are other areas that don’t need the same treatment. Knowing where to cut and where to hold the course will be key to maintaining both volume and profit targets over the coming months.
The bottom line is that your rate sheet should never be static; it should evolve and adjust to reflect the current micro and macroeconomic environment that you operate in. Performing a monthly closed-loop pricing process is a healthy and efficient way to ensure that you are on target to meet those pesky goals. This policy shift, while unexpected, should be treated as an extra cycle that you and your team perform, always with an eye on the end goal.
Adam has multiple years of experience in the banking and software industries, helping start-ups and mature companies execute business strategy. Adam has held senior finance and consulting positions at SAP Canada, a leading enterprise software developer, and Capgemini, a leading IT services and business consulting firm, specializing in software for the financial services industry. Adam has also led successful projects at CIBC, Scotiabank, Nationwide UK and Amex Bank of Canada, as well as playing key roles at ING Direct and Cervus Financial during their start-up phases. His experience includes: strategic planning, forecast/budget creation and tracking, business modeling, product development, creating and presenting software demonstrations, securitization and sale of mortgages and day-to-day bank operations. Adam is a Certified Management Accountant (Ontario) and holds an MBA from Queen’s University (Kingston, Ontario).