Saskatoon StarPhoenix

WHY POLOZ WOULD BE WISE TO PULL THE TRIGGER ON ANOTHER RATE HIKE

Jobless rate suggests economy has rarely been stronger, Kevin Carmichael writes.

- Financial Post kcarmichae­l@nationalpo­st.com

A little more than a year ago, the Bank of Canada stopped worrying about Donald Trump’s Twitter feed and focused on real news.

“Life goes on and decisions must be made in the meantime,” Carolyn Wilkins, the senior deputy governor, said near the end of a speech in Winnipeg on June 12, 2017.

Four weeks later, the Bank of Canada raised interest rates for the first time during Stephen Poloz’s tenure as governor. It would do so again at its next opportunit­y in early September, putting the benchmark rate back at the level at which Poloz found it when he took over from Mark Carney in the middle of 2013.

Pretty much everyone expects the four men and two women on the central bank’s Governing Council will decide to lift the policy rate another quarter-point to 1.5 per cent on July 11, which would be the first increase since January.

That’s the right call based on what the Bank of Canada has been telling us it cares about. If there is a pattern in the institutio­n’s decision making over the past year it’s opportunis­m. Think back to last summer. Trump already had everyone good and freaked out halfway through 2017. Yet Canada’s economy was on a roll. It seemed likely that U.S. policy would disrupt things eventually, but the central bank had a moment of relative calm in which it could act — and it used it.

Policy-makers have a similar window now. The economy isn’t growing as quickly, but it’s probably stronger than it was at this point in 2017.

Employment has plateaued after two strong years; Statistics Canada reported on July 6 that employers added about 32,000 net positions last month, reducing the overall decline since January to about 17,000.

Some have described the net job losses this year in negative terms, but they are too small to make definitive statements about the direction of overall hiring given the margin of error StatCan applies to its monthly Labour Force Survey.

The unemployme­nt rate suggests the Canadian economy rarely has been stronger: it rose to 6 per cent in June, still one of the lowest rates found in records that date to the mid-1970s. The jobless rate increased because more than 75,000 individual­s joined the labour pool in June, the biggest monthly increase in six years, according to StatCan. Only about half of them found jobs, so the unemployme­nt rate rose. Still, it’s a positive sign because it suggests employers are starting to make places for marginaliz­ed workers, something Poloz has said he hoped could be achieved by keeping interest rates low.

“Any doubts that the recent pause in Canadian job growth might lead the Bank of Canada to hold off on a rate hike have likely been erased,” Brendon Bernard, a former Finance Department economist who now works at the Toronto office of Indeed, the web-based hiring company, said in a statement on the latest employment figures.

To be sure, Trump is less of a theoretica­l threat today than he was a year ago. The U.S. is now engaged in tit-for-tat trade skirmishes with China, the European Union, Canada and Mexico that threaten to disrupt the strongest global economic growth in a decade.

That would hurt Canada, which has struggled to take full advantage of the surge in global demand. In a separate report on July 6, StatCan said the value of merchandis­e exports dropped 0.1 per cent in May from April — before Trump’s tariffs on steel and aluminum went into effect. Internatio­nal shipments of goods have averaged $47.3 billion per month this year, a three per cent increase from the monthly average in 2017, which is only mediocre given the level of demand.

“This is one of the rare instances where you could argue that given this uncertaint­y out there, why would you proceed with a rate hike if things turn from bad to worse later this summer?” Stéfane Marion, chief economist at National Bank Financial, said in interview with BNN Bloomberg on July 3.

The central bank will rework its forecast to reflect the various tariffs that have been applied since its last economic outlook in April. It’s possible that the results of that work could prompt policy-makers to leave interest rates unchanged, much as their assessment of the oilprice shock prompted them to unexpected­ly cut interest rates in January 2015.

But it’s also time to acknowledg­e that monetary policy can’t do everything. Take hiring. Wholesaler­s and retailers have cut more than 60,000 positions since the start of the year, according to StatCan. It’s the only industry to post such a dramatic shift, either positively or negatively. Some of the job cuts will be in response to weaker demand. Higher minimum wages could be playing a role. Yet what if the main reason for the decline is automation and the surge in e-commerce? If it’s the latter, lower interest rates won’t bring back those retail jobs.

The central bank’s main job is to control inflation, which is currently on target. Its other main job is to oversee financial stability, which should be a worry after a decade of ultralow borrowing costs. Not everything can be about Trump. The Bank of Canada has an opportunit­y to raise interest rates and it should use it.

 ?? JUSTIN TANG/THE CANADIAN PRESS ?? Bank of Canada governor Stephen Poloz and senior deputy governor Carolyn Wilkins announce the economic outlook in April. Most observers expect the central bank to lift interest rates to 1.5 per cent on July 11, which would be the first increase since...
JUSTIN TANG/THE CANADIAN PRESS Bank of Canada governor Stephen Poloz and senior deputy governor Carolyn Wilkins announce the economic outlook in April. Most observers expect the central bank to lift interest rates to 1.5 per cent on July 11, which would be the first increase since...

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