U.S. warning perks Canada’s ears
IMF cautions Fed to hold off on rate hike
OTTAWA • When global lending organizations raise a red flag about a country’s economic well-being, most observers stop and take note. Not because their diagnosis is always correct, nor always welcome — it’s really about who’s doing the talking.
The International Monetary Fund, much like the Or- ganization of Economic Development and Co-operation, can command a global audience when it speaks. And on Thursday, the IMF issued a critical warning to the United States, telling the Federal Reserve Board to hold off hiking its trendsetting lending rate — dormant at near zero since the end of 2006 — until mid2016.
Even then, the IMF said, an increase in borrowing costs should come only after wages and inflation targets set by policymakers are in sight and the economy is back on a sustainable course of growth.
Such stern advice — wanted or otherwise — immedi- ately raises the question of where Canadian interest rates will land if the Fed does follow the course laid out by the IMF. After all, economies in both countries contracted in the first quarter of 2015 — severe weather and West Coast port strikes playing a major role in the U.S., while the collapse in oil prices, as well as dragging business investment and exports, pulled down Canada.
The answer: It all depends on how the Bank of Canada judges the impact in this country of data generated south of the border — and the reaction of U.S. policymakers.
As of now, the IMF sees U.S. growth of 2.5 per cent in 2015, which is down from its previous forecast of 3.1 per cent, and three per cent next year. In April, it forecast Canada’s output would rise 2.2 per cent this year and 2.0 per cent in 2016. The agency has not issued an update on Canada’s economy.
“Deferring (a U.S.) rate increases would provide valuable insurance against the risk of disinflation (and) policy reversal ... ending back at zero-policy rates,” the Washington-based agency said.
The Fed, headed by Janet Yellen, “should remain data-dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident,” the IMF said, adding that “barring upside surprises to growth and inflation, this would put liftoff into the first half of 2016.”
The IMF, like the OECD, doesn’t call the shots when it comes monetary policy, or much else, really; it can only cajole countries and provide assistance and funding where needed. And when it comes to the U.S. central bank, the global agency has even less impact on decisions made in the world biggest economy.
“We don’t really think it’s going to move the needle on the debate inside (the Fed),” said Emanuella Enenajor, Canada and U.S. economist at Bank of America-Merrill Lynch in New York. “It’s certainly a factor that they take into account. But the IMF is one voice, including the OECD and various other global think-tanks, that are always commenting on policy.
“The Fed will be influenced by the data and not just by, say, the IMF’s suggestions.”
But, if the Fed is swayed by worsening data over the next few months and, indeed, holds off on rate hikes into the new year — running afoul of current private-sector forecasts of higher borrowing costs coming in September or December — Bank of Canada governor Stephen Poloz may find himself second-guessing his neutral position on when and in which direction rates should move in Canada.
Poloz could just as likely cut the BoC’s key rate as raise it. In fact, he has kept markets — and private-sector economists — wondering since he surprised almost everyone in January by chopping the bank’s lending level to 0.75 per cent from one per cent, where it had sat untouched since 2010.
“I think if the Fed decides to delay rate hikes, the implications for the Bank of Canada would really depend on why the Fed is delaying rate hikes,” said Enenajor.
“If it’s because inflation is soft, and growth still looks good, that’s not really a bad thing. If growth still looks decent, then that’s going to spill over and support Canada somewhat. And the absence of rate hikes will also prevent financial conditions from tightening notably in North America.”
In that scenario, a delay of Fed hikes “would be actually good for Canada — because it’s not due to weak growth, it’s just due to inflation,” she added.
“But if the Fed delays rate hikes because growth is slowing, that scenario is clearly one that is quite negative for the Bank of Canada and would cause them to take a more dovish turn. And it would be consistent, frankly, with our view that the economy is quite soft in Canada and they (Bank of Canada) would be on track for an ease in October.”
If growth still looks decent, then that’s going to spill over and support Canada