The central bank’s delicate balancing act.
HIKES AIM TO COOL GROWTH, BUT NOT TOO RAPIDLY
There’s been a lot of hullabaloo over both the timing and the future course of interest rates, and rightly so. Too much or too little. Too soon or too late. The Bank of Canada has been straddling those policy- issue divides since the Great Recession and into the not- so- great, nor consistent, monetary normalization phase.
Now, the central bank is striking while the economy remains hot — with a rate increase this month coming closely behind a surprising July increase, which had been the first upward move in seven years and one that many analysts had expected to be a little farther down the calendar.
“Recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly-based and self- sustaining,” governor Stephen Poloz said in last Wednesday’s statement, backing a decision to raise the key lending rate a quarter point to one per cent.
The economy might have something to say about that.
For one, it’s already accepted wisdom that growth will slow in the second half of this year, giving some time for the blistering pace in the first two quarters to settle into a more comfortable and sustainable pace, one that can hold inflation relatively steady as excess growth capacity is gobbled up and jobs are created.
Gross domestic product was forecast in the central bank’s July quarterly monetary policy report to be around 2.8 per cent for all of 2017.
Reflective of the economy eating up much of the excess capacity in the system during the first half of this year, the central bank sees a slower pace of growth in the last two quarters. Overall GDP for 2018 and 2019 will level off to around two per cent and 1.6 per cent, respectively, according to both official and private forecasts.
The concern for the Bank of Canada is finding the right balance and maintaining it without tripping over any unforeseen obstacles, such as the challenges of Brexit, Donald Trump and NAFTA providing new global concerns and uncertainties.
In last week’s rate decision, however, policymakers “took the fast lane in returning rates to one per cent, hiking 25 basis points when most were expecting a hold until October,” said Andrew Grantham, an economist at CIBC World Markets in Toronto.
WHAT MATTERS IS HOW QUICKLY RATES MOVE UP FROM HERE
“In many respects, it didn’ t matter t oo much whether the move was delivered this month or next. What matters more is how quickly rates move up from here, and within the statement there were fewer hints than we would have expected of a prolonged pause,” Grantham said.
Last Wednesday’s rate increase “sets the stage for them to pause for the rest of the year,” said Craig Alexander, senior vice- president and chief economist at the Ottawa- based Conference Board of Canada.
The bank will “assess how the tightening has impacted the economy. And, then next year, they will find, I suspect, that the Canadian economy is strong enough to accept a bit more in terms of tightening — but in a very gradual and incremental way,” Alexander said.
Already, there are some mixed signals on the Canadian economy.
The labour force added about 22,000 net new jobs in August, according to Friday’s report from Statistics Canada.
The t otal growth was basically in line with private forecasts, and enough to lower the unemployment rate to 6.2 per cent from 6.3 per cent in July — the lowest level in nine years.
“While very solid on the surface, the details of this report are generally sluggish, leaving a mixed bag,” said Douglas Porter, chief economist at BMO Capital Markets. “For the Bank of Canada, the overall report doesn’t push them significantly in either direction because the firmer wage backdrop and the further fall in the unemployment rate are largely offset by the other softer details.”
Economic data coming this week include overall household income, based on the 2016 census report from Statistics Canada, followed by the new housing prices index for July.
“Yes, the (recent) data have been strong but the fact that this feeds into a view of (being) board- based and selfsustaining, I would certainly have some skepticism (there as well),” said David Wolf, a global adviser at Global Asset Allocation Group at Fidelity Investments in Toronto.
In a television interview, Wolf said that economic growth has been based on a fairly narrow set of drivers, particularly the consumer and consumer durables such as the housing market, which for the past three years have accounted for much of the growth in the economy.
“You have the uncertainty surrounding NAFTA, you have general economic uncertainty which has been pressing on i nvestment everywhere. So it’s hard to see ... what’s going to replace the lost consumer housing element,” Wolf said.