National Post (National Edition)
Credible
CREDIBILITY ‘TOP OF MIND’ WHEN BOC HIKED.
Ahead of last week’s interest-rate announcement, I talked to a Bay Street economist who wondered how much credibility would factor in the Bank of Canada’s decision. Quite a lot, as it turned out. “It’s always top of mind,” Stephen Poloz, the governor, told me in an interview last week after the central bank raised the benchmark rate for the first time in six months. “If you were thinking about doing something differently, your explanation would (have to) be very rigorous because you’d be thinking, ‘Well, my credibility is at stake if people think, oh that’s just smoke.’ You can’t put out something that’s just smoke. No one is going to buy it. So you need to have really good reasons for whatever it is you do or don’t do.” Those who thought the Bank of Canada would — or should — leave interest rates unchanged last week appeared to put too little weight on what such a swerve would have meant for the central bank’s reputation.
The vast majority of market participants had judged, correctly, that the central bank’s conditions for an interest-rate increase had been met. The Bank of Canada is constantly processing information, but policy-makers had made clear that they were primarily interested in three things: business investment, exports, and the response of heavily indebted households to higher interest rates. Data on all three of those items had been mostly positive. Inflation was on target, but with upward momentum. When policy-makers left interest rates unchanged at the end of May, they said they still believed that borrowing costs needed to be higher. Therefore, if they hadn’t raised the benchmark rate last week, they would have needed a compelling reason to disappoint so many people. There wasn’t one. Assuming that U.S. President Donald Trump, a consistent liar and flip-flopper, is serious about wrecking the global trading system would have looked like “smoke” against hard evidence that most Canadian exporters are expanding to keep up with orders.
The Bank of Canada acknowledged that punitive U.S. duties on automotive imports would hurt Canada, but a resolution to trade differences is also a possibility. The latter could boost economic growth and put upward pressure on inflation, which is ultimately what the central bank cares about. “There are lots of things I could tell you that are big and nice, as opposed to hairy, that we’re also not allowing to influence our decisions,” Poloz said in the interview. “For example, NAFTA gets restored. Boom. Aluminum and steel tariffs just go away. We should put a higher weight on that possibility than on auto tariffs, frankly. But, you know, they’re both big and they’re harder to quantify.” Poloz isn’t sticking his head in the sand. Rather, he’s reinforcing his message of the past few years that Canadian monetary policy will be guided by a careful, meeting-by-meeting analysis of data, not a predetermined path or hypothetical scenarios. Trade dominated deliberations, suggesting that if there was a reason to panic, the men and women on the Governing Council would have found it. Household debt remains a threat, but the central bank’s analysis of mortgage data found relatively few Canadians will be forced to renew their home loans over the next couple of years. That means most homeowners have time to prepare for higher interest rates. Bottom line: there was no good reason to avoid raising interest rates last week, at least according to the conditions that the central bank had set.
It’s easy to forget about the role credibility plays — or should play — in policy making because so few in Ottawa are committed to it.
Last month, Foreign Affairs Minister Chrystia Freeland justified the government’s decision to retaliate against U.S. aluminum-and-steel tariffs by citing the “degree to which there is national solidarity” on the subject. There is no evidence in that answer that the government has thought through what it is doing. The decision to engage Trump might be popular, but it lacks credibility because no one has offered a thorough explanation for why tit-for-tat was chosen over other tactics.
Credibility matters. In 2015, when oil prices collapsed, the Bank of Canada cut interest rates to cushion the blow. But Mexico’s central bank had to raise interest rates to slow capital flight and keep the country’s currency from collapsing. The Bank of Mexico is highly regarded by its peers, but it hasn’t established the complete trust of international investors yet. Anyone interested in understanding the way Poloz approaches his job should keep Mexico’s recent experience in mind. “They just got pounded, absolutely pounded, way out-sized compared to the size of their shock and their economy,” he said. “We don’t want to have any risk of that happening to us. That’s why (credibility) matters so much.”
YOU CAN’T PUT OUT SOMETHING THAT’S JUST SMOKE.