Source: The Canadian Press
The moment of decision over interest rates is drawing closer for the Bank of Canada’s enigmatic governor Mark Carney.
After sitting on the sidelines the past two monetary policy meetings, pressure is starting to build over when to again apply the interest rate brake.
A few days ago, the C.D. Howe monetary policy council — a panel of hand-picked economists from the private sector and academia — told the governor the time has already come and he should hike the trendsetting rate 25 basis points to 1.25% on Tuesday.
By the end of the year, the consensus of the panel says the policy rate should be lifted to 2.5%, from the current 1%.
One of those casting the pivotal “yeah” in the five-four split decision calling for rate escalation to begin this week was its newest member, Sheryl King, chief economist with Bank of America Merrill Lynch.
“Policy rates are extremely low right now and probably too accommodative for the amount of growth we are going to see over the next 12 months or so,” she said. “The economy is starting re-accelerate, (and) we are starting to see signs of pretty sustained U.S. economic activity.”
Like Carney and the federal government, she is also worried low rates for too long a period are too tempting given that Canadians have already piled on debt at record levels.
In recent public statements, however, Bank of Canada officials have made it clear the central bank is not the go-to body to deal with excessive debt. First and foremost are the borrowers and the banks, said deputy governor Agathe Cote earlier this month, then the federal government.
For his part, Finance Minister Jim Flaherty continues to hint he wants the banks to rein in home-equity loans and to suggest he is prepared to do it if lenders won’t.
“The government remains concerned in the level of household debt and will look at taking prudent steps to moderate that growth,” Prime Minister Stephen Harper said Friday.
In his October announcement, Carney gave all the impression of a governor planning to stay on the sidelines for a long time following three successive hikes during the summer, while everyone else in the G7 stood pat.
“The economic outlook for Canada has changed,” he declared in an accompanying statement, ratcheting down expectations for growth this year from a relatively rosy 2.9% to a decidedly pasty 2.3%.
The statement Tuesday might very well begin the same way, with the opposite tilt.
Since October, the U.S. Federal Reserve put an additional US$600 billion of stimulus on the economy’s table, and President Barack Obama did one better by not only extending Bush-era tax cuts, but boosting other entitlements.
That has made all the difference in the outlook for both the U.S. and Canadian economies, said Bank of Montreal economist Douglas Porter, who believes Carney will adjust the growth forecast again Tuesday to somewhere between 2.3 and 2.9%.
Washington’s actions have likely added between half and one percentage points to the U.S. growth potential and that should help boost Canadian exports and prices for commodities such as oil.
“There has been a big improvement in the U.S. outlook,” Porter said. He points out that even with the U.S. consumer supposedly tapped out, retail sales rose again in December and are up almost 8% from a year ago.
Porter and other analysts think that has made it more likely Carney will move quicker on interest rates, from mid-summer — the consensus view a couple of months ago — to as early as March 1.
Some, however, are not convinced.
While Carney may take advantage of improved conditions and strike a “hawkish” tone on interest rates, there are still enough headwinds to stay his hand, says David Tulk, senior strategist with TD Securities.
The key problem, he says, is that the U.S. economy is still being propped up by the government and the private sector has yet to show it can take over.
“The Bank of Canada is still more likely to consider hikes in an environment where private sector participation is more assured,” he said, not where the hand-off from public-to-private resources is still theoretical.
As well, raising interest rates in Canada while the U.S. remains at virtual zero will only strengthen the loonie, adding one more millstone on the back of the struggling manufacturing sector.
Finally, there’s the sticky problem that even if he felt it advisable to hike rates Tuesday, Carney has not prepared the markets for such a eventuality.
The opposite is in fact true. The last time the governor spoke on the issue, he made it clear he was concerned about getting too far ahead of the U.S. Fed.
“I don’t think it’s a close call for Carney at all (Tuesday),” said Porter. “The market has factored in a 1% chance of a rate hike.”
Even King, who favours an interest rate boost, said she doubts Carney will move Tuesday.
But she says the discussion has now tilted decidedly toward interest rate increases sooner than later. Unless something dramatically negative occurs, King says Canadians, especially those who have taken on a lot of debt, should brace themselves for higher interest rates going forward.
Consensus tilting toward interest rate hikes coming sooner … but not Tuesday
Canadians should prepare for higher interest rates
- By: Julian Beltrame
- January 16, 2011 December 14, 2017
- 14:45