Why BOC is so wary of raising rates
Policy-makers think rate cut would do more damage, Kevin Carmichael writes.
Carolyn Wilkins, the No. 2 at the Bank of Canada, got a taste of the kind of power that comes with being the No. 1.
Wilkins, who is on everyone’s shortlist of potential replacements for the current governor, Stephen Poloz, spoke in Montreal on Tuesday. She used different words to restate the position that the Bank of Canada laid out a couple of weeks ago in a new policy statement, an updated economic outlook, an overview of the deliberations that led to the decision to leave the benchmark rate unchanged, and a press conference.
The Canadian dollar fell. “While the speech by Senior Deputy Governor Carolyn Wilkins was enough to unsettle the loonie, which lost about 0.3 per cent after it (was) released, it in no way signalled that Canada’s central bank is actively considering lower interest rates in the near future,” Don Curren, a market strategist at Cambridge Global Payments, advised the firm’s clients in an email.
Wilkins did unveil a dandy new metaphor to help us get our heads around how the central bank is setting up for the short term, which some forecasters think will bring the first global downturn in a decade.
“The Bank of Canada and other authorities must assess the risks and have the right safeguards in place,” Wilkins said. “Ideally, you want to put the winter tires on before the snow falls. It not only protects you, but also everyone else who’s on the road.”
Wilkins acknowledged the possibility of a slowdown, telling her audience that even if the trade wars stop getting worse, they still could result in US$1 trillion of lost global economic output by 2021. But for now, the central bank remains extremely reluctant to do anything that would cause companies and households to add to an already menacing pile of private debt.
Lower interest rates might offset some of the anxiety over trade heading into next year, but only at the expense of sowing the seeds of a new financial crisis down the road. Poloz’s Bank of Canada approaches policy as an exercise in risk management, and at the moment, policy-makers think an interest-rate cut would ultimately do more harm than good.
“With vulnerabilities high and inflation close to target for more than a year, we said at our most recent interest-rate decision that taking out insurance wasn’t worth the cost at that time,” Wilkins said. “We also said that in considering the appropriate path for policy, we’d watch how the trade situation and household vulnerabilities evolve as well as fiscal policy developments.”
Currency traders who keep losing money by basing their bets on verbiage would do better by following developments related to those key points: household debt, inflation, trade, and government spending.
Earlier this week, Statistics Canada reported that factory sales dropped 0.2 per cent in September, which caused the Bank of Nova Scotia to cut its realtime forecast for third-quarter economic growth to 1.2 per cent. (The Bank of Canada estimates that the economy can grow a little less than two per cent a year without dangerously stoking inflation.)
Meanwhile, prices remain anchored. Statcan said on Wednesday that the Consumer Price Index rose 1.9 per cent in October from a year earlier, while three separate measures that remove volatile prices from the mix posted readings of 2.1 per cent, 2.2 per cent, and 1.9 per cent.
The latest numbers, “should keep the (Bank of Canada) hesitant to add further monetary policy accommodation unless easing is warranted by a more substantial worsening in the growth and inflation outlook,” Veronica Clark, an economist at Citibank, said in a note.
An unexpected surge in immigration, coupled with record-low levels of unemployment, has offset weakness in trade and investment to date. But can it last? As Wilkins noted in Montreal, households’ debt-service costs are at historic highs. A greater amount of disposable income is being used to pay off debt rather than generate demand. The economy’s main engine is maxed out.
“The economy is challenging,” Kevin Macnab, chief executive of St. Jacobs, Ont.-based Home Hardware Stores Ltd., told the Financial Post’s Jake Edmiston in an interview on Wednesday. “This year we’ve been pleased with our growth that we’re seeing. But it definitely is a challenging environment.”
The news that Lowe’s Companies Inc. plans to close three dozen “underperforming” stores in Canada raised questions about what’s happening on the ground in Canada, below the surface of those impressive headline hiring numbers.
When Lowe’s bought Quebec-based Rona Inc. in 2016, Canada was still feeling the effects of the post-crisis housing boom.
On a year-over-year basis, sales of building materials, garden equipment, and related supplies averaged monthly growth of 5.6 per cent between January 2016 and December 2018, according to data compiled by Statistics Canada. Growth has stagnated this year, albeit at a high level. Sales in that segment of Statcan’s monthly report on retail trade were $2.9 billion in August, close to the peak in data that date to 2012.
“The economic indicators we are monitoring and the results we achieved in 2019 suggest that the construction and renovation market is doing well,” said Stéphanie Couturier, spokeswoman for Boucherville, Que.-based hardware chain
BMR Group, which added three stores in Ontario this year. “The economic outlook and the recent acquisitions BMR Group made put us in a growth mode and not in a rationalization mode.”
Fiscal policy probably will be the deciding factor for the Bank of Canada. Prime Minister Justin Trudeau re-upped Bill Morneau as finance minister on Wednesday, and Bloomberg News reported that the new government intends to table legislation on the middle-class tax cut the Liberals promised in the election campaign.
If they do, expect the Bank of Canada to remain on hold for the foreseeable future.