Strong economies pushing rates up
A hike tomorrow could signal more from Bank of Canada E. U., U.S. counterparts already moving, to keep inflation at bay
The Bank of Canada has spent much of the past two months issuing blunt warnings it is raising interest rates, but Bay St. wasn’t completely buying it. Now even the most reluctant forecasters are sold.
Friday’s stellar employment report, which saw the jobless rate for November fall to a 31year low of 6.4 per cent, convinced the final holdouts that the central bank will be implementing a series of increases in its trend- setting overnight rate.
“ The winds have certainly changed,” said David Wolf, chief strategist at Merrill Lynch Canada.
Recent economic data for both Canada and the U. S. are coming in much stronger than people had expected, suggesting that the Canadian economy is expanding at or very near its capacity constraints, the point where inflation becomes a worry, Wolf said. The November jobs data also showed that average hourly wages were 3.9 per cent higher than a year earlier, suggesting firms may eventually have to pass along some of those added labour costs by raising their prices.
“People like myself have acknowledged that by pushing up our forecast,” Wolf said.
Until Friday, he expected the central bank would hike its overnight rate a quarter point tomorrow, to 3.25 per cent, and then move to the sidelines.
Wolf now predicts two more quarter- point increases in early 2006, with the risk of even more, though he’s not calling for a more aggressive half-point hike.
“ But the thought had crossed my mind seeing the data we have had.” The Bank of Canada’s overnight rate directly influences variable rate loans as well as a commercial bank’s prime rate. It also exerts pressure on longerbond yields, though investors had resisted until the past few weeks. The best argument against central bank rate hikes is the fact that higher Canadian interest rates tend to push up the dollar, which is already hovering around the 85- cent mark and making life difficult for exporters. Andrew Pyle, senior financial markets economist at the Bank of Nova Scotia, is predicting that strong global energy prices will push the loonie to 90 cents
cent.
Martin was caught flat-footed by the news, offering an unpersuasive cheerup speech Thursday in Cornwall, where the closing of a local Domtar mill will see 910 positions disappear including the 390 positions Domtar cut last December. The campaign event was scheduled prior to the Domtar bombshell. Still, Martin could have comforted the Domtar protesters he addressed with a plan for reviving the industry along the lines of what this column called for Thursday to assist a devastated pulp and paper sector that has been all but forgotten by Ottawa.
Instead, the PM offered the clichéd response on such occasions, that the workers whose lives had just been disrupted should promptly retrain themselves for other vocations. That didn’t cut much ice with Todd Villeneuve, a 20-year veteran of the Cornwall plant. “It’s not like tomorrow I can pick up a pair of wire cutters and call myself an electrician,” Villeneuve said. “That’s not the way real life works.” The Grits, preoccupied in the past two years with health-care reform and federal- provincial revenue sharing, neglected to develop a comprehensive industrial growth plan. That was a craven oversight. After all, while the economy has created 220,000 jobs in the past year, Canada lost 129,000 high- paying manufacturing jobs in that time. Which gave Tory campaign co-chair John Reynolds an opening Friday to complain, “There’s no strategy in this country for our major industries who are having to compete in a tough world.” The Tories’ remedy? Lower corporate and energy taxes. By not making the economy the centrepiece of their campaign, and by running on past achievements rather positioning themselves as champions of Canadian industrial progress, the Grits have allowed other issues to dominate the campaign. Issues that don’t play to Liberal strengths.
In these early days, as wisely reflected in Stephen Harper’s stump speeches, the chief issue is a desire for change after 12 years of Liberal rule. And other issues — corruption, health care, tax cuts — also eclipse the country’s strong economic performance in voters’ minds. Martin hasn’t helped his cause by coming out of the gate with an almost certainly doomed gambit to make an issue of Quebec separation. The bottom line is that voters tend to judge politicians on their performance in keeping their most loudly proclaimed promises. Other accomplishments, no matter how noble and ambitious, exert less influence on voters.
Brian Mulroney (“Jobs, jobs, jobs!”) and Bill Clinton (“ It’s the economy, stupid”) were rewarded with re-election by keeping their chief promise of turning their economies into job-creation machines. But in 12 years, the Chretien and Martin Liberals ran on deficit reduction, regarded by voters today as old news, and not on job creation, the issue that most resonates with the electorate.
Martin’s Grits lack focus, asking voters to judge them on a smorgasbord of often obscure achievements and vague pledges. The Tories, more winsome to date, have attached measurable timetables to their promises of GST cuts and shorter waiting times for health care, against which their performance can be measured. The Liberal campaign so far bears an eerie resemblance to the 2000 presidential contest in the United States, where a maddeningly vague Democrat standard-bearer tried to distance himself from the scandals of his predecessor, ceding what should have been an easy victory to an untested rival blessed with an image of decisiveness.
Martin’s best hope may rest with another parallel from history. The jobless rate today hasn’t been this low since 1974, the year Pierre Trudeau managed to secure a renewed majority after two trying years leading a minority government.
But then, no one would confuse Trudeau’s commanding resolve with that undisciplined approach to policymaking or campaigning that has long characterized Paul Martin — even when his own job is on the line.