‘In ei­ther di­rec­tion’

National Post (Latest Edition) - - FRONT PAGE - Jesse Sny­der

• Bank of Canada gover­nor Stephen Poloz looked to tem­per re­cent op­ti­mism over the Cana­dian econ­omy, sig­nalling in a speech Wed­nes­day a more open- ended mon­e­tary out­look that could see i nter­est rates move “in ei­ther di­rec­tion” amid fears over ris­ing house­hold debt lev­els.

In com­ments to a lo­cal trade or­ga­ni­za­tion in St. John’s, Poloz said there was “no predetermined path” for in­ter­est rates in the sec­ond half of 2017 and be­yond.

He also said ris­ing house­hold debts in Canada leave the econ­omy ex­posed to any­thing from higher hous­ing prices to an uptick in un­em­ploy­ment lev­els.

“The Cana­dian econ­omy is not well pre­pared for a neg­a­tive shock to the econ­omy,” Poloz said.

The gover­nor laid out sev­eral f ac­tors that are likely to in­flu­ence fu­ture rate de­ci­sions, in­clud­ing oil prices move­ments, an over­heated hous­ing mar­ket and a higher Cana­dian dol­lar.

The loonie fell 0.33 cents to US80.57 cents on the gover­nor’s dovish com­ments.

He said fur­ther in­ter­est rate hikes will be in­creas­ingly data-driven rather than based on eco­nomic mod­el­ling, say­ing the bank would “not be me­chan­i­cal in our ap­proach to mon­e­tary pol­icy.”

His com­ments come amid an in­creas­ingly chal­leng­ing en­vi­ron­ment f or cen­tral bankers, who have gen­er­ally strug­gled in re­cent years to meet in­fla­tion­ary tar­gets while nav­i­gat­ing a surge in po­lit­i­cal na­tion­al­ism and geopo­lit­i­cal un­cer­tainty.

The Bank of Canada has raised its overnight rate twice in re­cent months, ef­fec­tively re­vers­ing its de­ci­sion in 2015 to cut back rates amid a slump in oil prices.

High eco­nomic growth in the past two quar­ters has put Canada among the fastest­grow­ing economies in the de­vel­oped world, prompt­ing the rate hikes. But mar­ket ob­servers say the out­look is not as rosy as re­cent data might sug­gest, par­tic­u­larly as de­vel­oped economies are ex­pected to see slower growth for the fore­see­able fu­ture.

The cen­tral bank will need to ap­proach its mon­e­tary pol­icy with an in­creas­ingly deft hand, a point that Poloz fo­cused heav­ily on in his ad­dress Wed­nes­day.

“The Bank of Canada will have to be par­tic­u­larly gen­tle,” said Nick Exarhos, an an­a­lyst with CIBC Cap­i­tal Mar­kets based in Toronto.

In­ter­est rate hikes today, due to higher lev­els of house­hold in­debt­ed­ness, have roughly 1.5 times the im­pact that they had around the early 2000s, he said. “Each con­sec­u­tive in­ter­est rate hike packs a big­ger punch.”

Cana­dian house­hold debt as a per­cent­age of dis­pos­able in­come is among the high­est in de­vel­oped na­tions, ac­cord­ing to data from the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and Devel­op­ment (OECD).

Canada’s debt- to- dis­pos­able in­come was 175 per cent in 2015, the eighth-high­est in the group. Greece, the me­dian coun­try among OECD mem­bers in terms of debt-todis­pos­able in­come, was 119 per cent in 2015.

Economists and mar­ket ob­servers have wor­ried openly about some of the un­der­pin­nings of the Cana­dian econ­omy ap­pear­ing weak, par­tic­u­larly busi­ness in­vest­ment lev­els and slug­gish ex­ports.

Ac­cord­ing to CIBC mod­el­ling, re­cent ex­port lev­els are 10 to 15 per cent lower than they had been in past eras when the Cana­dian dol­lar was also rel­a­tively weak. The trend is partly due to a loss in man­u­fac­tur­ing ac­tiv­ity, Exarhos says, that oc­curred when the Cana­dian dol­lar was soar­ing along­side high oil prices.

Re­cent moves in Ot­tawa to stim­u­late the econ­omy t hrough mas­sive spend­ing pro­grams have be­gun to trickle down, an­a­lysts say.

“Cana­dian eco­nomic mo­men­tum is all but cer­tain to cool as the econ­omy comes off its debt- in­fused high, al­though a crash is not ex­pected to be im­mi­nent,” ac­cord­ing to a note from Rus­sell In­vest­ments, a U. S. firm man­ag­ing roughly US$ 277 bil­lion in as­sets.

The bank’s next rate de­ci­sion is sched­uled for Oct. 25.

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