Regina Leader-Post

Poloz raises interest rates

Investment, export rises spur move despite friction with U.S., Kevin Carmichael writes.

- Kcarmichae­l@nationalpo­st.com Twitter.com/carmichael­kevin

Bank of Canada governor Stephen Poloz’s tale about how the economy would recover from the Great Recession is finally coming true.

The central bank ignored Donald Trump’s trade vandalism and raised its benchmark interest rate a quarter point to 1.5 per cent Wednesday.

It did so mostly because of an unexpected jump in business investment and exports this year, two growth engines that Poloz said in 2013 would drive Canada’s battered, post-crisis economy back to better days.

Instead, those motors sputtered, forcing the central bank to keep interest rates low. That left the burden of economic growth on Canada’s debt-addled households, which did their duty and kept spending. The economy stayed afloat, but at the expense of record levels of private debt that now threatens future growth.

But at last, Corporate Canada appears to have taken the baton.

“The compositio­n of growth is shifting,” the Bank of Canada said in its policy statement. “Exports are being buoyed by strong global demand and higher commodity prices. Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors.”

Almost everyone on Bay Street anticipate­d the move, albeit it took some longer to come around. A minority continued to insist the BOC should have left borrowing costs unchanged to create a cushion against the U.S. president’s next batch of punitive import duties. On the eve of the interest-rate announceme­nt, the U.S. escalated its trade war with China, scheduling tens of billions in additional duties.

Canada is also on Trump’s hit list. The central bank now reckons the combinatio­n of U.S. duties on Canadian lumber, newsprint, aluminum, and steel — and the chilling effect of trade uncertaint­y on investment — will subtract two thirds of a point from gross domestic product by 2020, an increase from its previous estimate in April.

That’s the equivalent of about $12 billion, so it’s not nothing.

But the bigger story in the Bank of Canada’s new Monetary Policy Report is that most companies are responding to their order books rather than the headlines in the business pages.

Policy-makers significan­tly upgraded their outlook for business investment and exports, offsetting weaker household consumptio­n.

Hard evidence of that sort proved more compelling than Trump’s tweets. Poloz and his counterpar­ts on the Governing Council ultimately ignored those who argued that interest rates should be left alone, although the governor chose to address the nervous Nellies at a press conference after the decision. “There was speculatio­n that the bank would not move interest rates today because of the possibilit­y of further trade measures,” the governor said in the opening statement, which the central bank uses to provide context and correct popular misconcept­ions. “The bank cannot make policy on the basis of hypothetic­al scenarios. We felt it appropriat­e to set aside this risk and make policy on the basis of what has been announced.”

It’s incongruou­s that the longawaite­d rotation to exports and investment is happening amid the early stages of a global trade war.

Alas, the Trump Effect is a complicate­d thing. The president’s trade policy represents the biggest threat to Canada’s prospects, and his fiscal policy is responsibl­e for a temporary surge in demand for Canadian exports.

Economists will tell you that it is difficult to overcome economic gravity. Canadian executives are undeniably worried about the future, and some are either delaying expansions or shifting production in ways that will avoid Trump wrath. Yet as more data comes in, it is becoming clear that most Canadian companies are rallying to meet an influx of orders.

The improvemen­t in investment and exports was so strong that the BOC was forced to raise the pace at which it thinks the economy can grow without triggering inflation. The new potential growth rate for 2018 is 1.8 per cent; the figure for 2019 and 2020 is 1.9 per cent.

All things equal, the revision suggests the central bank will be less pressed to raise rates in the future. The central bank aims to keep inflation advancing at an annual rate of about two per cent, which it thinks it is on track to achieve over the next couple of years, although it said inflation may jump temporaril­y due to higher gasoline prices, increased minimum wages, tariffs, and a weaker currency.

“I don’t think they are trying to stop the economy,” said Chris Catliff, chief executive at BlueShore Financial, a credit union in Vancouver. “It’s really about trying to normalize interest rates. They are doing the right thing.”

Stronger exports and investment are offsetting weaker spending by households.

The Bank of Canada predicted GDP will increase two per cent this year, driven by different engines. Consumptio­n will account for 1.3 percentage points of that growth, less than expected earlier this year. Business investment will account for 0.7 percentage point of the GDP increase, and exports 0.5 percentage point, the central bank estimates. Both are big increases from the April outlook.

The threat of increased protection­ism means it would be folly to predict a fairy-tale ending. Still, the story being written on the ground in the Canadian economy appears to be different than the one you’ve been reading about in recent months.

 ?? DARREN BROWN/THE CANADIAN PRESS ?? Bank of Canada governor Stephen Poloz brushed aside concerns about U.S. President Donald Trump’s trade vandalism and raised its benchmark interest rate a quarter point to 1.5 per cent on Wednesday. The bigger story in the Bank of Canada’s new Monetary Policy Report, Kevin Carmichael writes, is that most companies are responding to their order books rather than the headlines in the business pages.
DARREN BROWN/THE CANADIAN PRESS Bank of Canada governor Stephen Poloz brushed aside concerns about U.S. President Donald Trump’s trade vandalism and raised its benchmark interest rate a quarter point to 1.5 per cent on Wednesday. The bigger story in the Bank of Canada’s new Monetary Policy Report, Kevin Carmichael writes, is that most companies are responding to their order books rather than the headlines in the business pages.

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