Looking to the central bank for answers
First question: What justified rate hike?
• The next time we hear from Stephen Pol oz, the Bank of Canada governor will be a long way from home, but still followed by a lot of questions on the economy. Whether, in fact, Poloz actually delivers some specific answers in a speech Sept. 27 in St. John’s, N.L. or during a question period that follows his remarks is debatable and dependent on what he says and what he’s asked.
Still, Canadians will be looking for at least some answers. Top among them: What justified the BoC’s decision on Sept. 6 to hike its key interest rate — the benchmark that sets the tone for commercial banks and, ultimately, household finances — when many private-sector economists had given that outcome a less than 50- 50 chance of happening?
The central bank’s reasoning for the move was that “recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly- based and self-sustaining,” according to the rate-decision statement.
“Consumer spending remains robust, underpinned by continued solid employment and income growth,” the bank said. “There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies.”
But don’t expect a lot of specifics on that front from Poloz in his speech in St. John’s — even though the governor, now more than ever, has the eyes and ears of millions of people across in the country.
Most likely, his address will stay clear of any major currency- sensitive issues — such is the pattern of these kinds of scripted events — and stick with the nutsand- bolts theme of a strong economy. After all, the Bank of Canada had al r eady begun tightening monetary policy in July, lifting its trendsetting lending rate by a quarter of a point to 0.75 per cent — the first upward move in seven years.
At the time, many observers had expected Poloz and his team to stand back and monitor the impact of that initial rate increase before again moving borrowing costs higher — most likely on Oct. 24 to coincide with the bank’s revised economic forecasts for its quarterly Monetary Policy Report and accompanied by an announcement on the level of the key interest rate.
Instead, Poloz j umped ahead of that practice — though not unheard of — and issued the stand- alone September hike in borrowing costs. That could mean the October MPR will come and go without any rate adjustment — doubtful, but not undoable — depending on what the latest economic data relieves.
Any indication of how the central bank is leaning this time around is difficult to read, which again is a communications issue for policymakers and the public.
“( But) look to governor Poloz to clarify that part of the climb in the Canadian dollar attributable to generalized U. S. dollar weakness against most major currencies represents a drag on export growth and inflation ahead,” said Avery Shenfeld, chief economist at CIBC World Markets. “While the rest of the speech will reflect optimism on Canada’s outlook, any note of caution about the exchange rate would cool the market’s enthusiasm for taking the loonie even stronger.”
Meanwhile, Canadians will hear Monday from another Bank of Canada policymaker.
Deputy governor Timothy Lane will speak to the Saskatoon Regional Economic Development Authority on the topic of “How Canada’s international trade is changing with the times.”
But Poloz himself has no official public events scheduled ahead of the St. John’s speech.
In the interim, the BoC’s senior deputy Carolyn Wilkins offered to fill in some of the blanks in an effort to clarify the Sept. 6 rate hike decision.
“With any central bank anywhere in the world ... you’re going to find incidents where participants were surprised. That’s just the nature of forward- looking policy that relies on forecasts that are not l i ke engineering exercises,” Wilkins told reporters following a monetary policy conference Thursday in Ottawa.
“What’s the usefulness of additional transparency? How can it avoid surprises that maybe could have been avoided? I think that’s very useful because there’s absolutely no disagreement that people need to understand how we think about the economy, what goes into our decisions ... what factors do you take into account.”
THE REST ... WILL REFLECT OPTIMISM ON CANADA’S OUTLOOK.