Following a month of surprisingly strong indicators on the economy, it is an interesting thought experiment to imagine what it would take to make Bank of Canada governor Stephen Poloz actually adjust Canadian interest rates this year.
It’s a subject that is always of fascination for heavily borrowed Canadians laden with mortgages, car loans and home equity lines of credit. A quarter-point hike in rates would leave many scrambling to scrape together a little more cash. A cut would potentially offer a little relief.
The bank releases its latest Monetary Policy Report tomorrow, when Poloz and his senior deputy, Carolyn Wilkins, will also submit to detailed questioning.
An analysis of futures trading markets certainly shows the chance of Poloz announcing a change in rates is effectively zero.
And while they are unlikely to say it themselves, it may well be that officials at the Bank of Canada will find themselves paralyzed in 2019 by political and economic uncertainty. As some market advocates call for cuts and economic indicators hint at rising inflation, it will almost certainly take some kind of serious jolt to break the bank out of its current immobility.
Expect to hear Canada’s central bankers talk Wednesday about a balance of risks between economic good health and the threat of decline.
And while the Bank of Canada’s own spring outlook, released last week, declared that demand was slowing, the market gloom at the end of last year appears to have gone away. Back then, people complained central banks were raising rates too fast for a moribund economy. But over the last two weeks, stocks have been flirting with record highs.
There are also new glimmers of increased inflation. Despite rock-bottom gas prices in February, consumer prices are once again nudging into the range where the bank must begin thinking about whether, or when, to begin raising interest rates.
Two of measures of core inflation — the statistic the bank uses to decide whether to cool the economy with higher interest rates — are now back up to two per cent, the mid-point of the bank’s target inflation range.
No more cheap gas
Without low gas prices, Statistics Canada said last month’s inflation rate would have been 2.2 per cent (rather than the 1.9 per cent recorded). And the majority who still use fossil fuel vehicles will know those extremely low pump prices that were holding the inflation rate down are no longer with us.
One new anomaly that will skew gasoline’s contribution to inflation is the federal carbon tax. As has been reported, the recent rise in gas prices is only partly due to carbon pricing — and the expectations of another 15 cent increase are not caused by carbon pricing at all.
As many Canadians know, the carbon tax is being refunded, so you will not be out of pocket. But the statistical effect may be to show an increase in inflation over the medium term. Unlike the volatile factors affecting energy prices, if it works as planned, carbon pricing is not going away.
Until Canadians adjust their spending away from fossil fuels, the net effect should contribute to higher prices: directly on fossil fuels and indirectly on things such as goods shipped in diesel trucks.
Since Canadians get that money back, the impact on the most households’ finances will be negligible. But like the difference between house-price inflation, which is not measured in the inflation stats, and rising mortgage costs and rents which are, such statistical quirks may be the price of having a consistent measuring tool for comparison over time.
At the end of last year and even at the beginning of this one, some analysts were suggesting Poloz would or should actually cut interest rates this year. Last week’s Business Outlook Survey, based on interviews with Canadian business leaders, would seem to indicate the bank should not be considering a rate hike.
But as other commentators have mentioned, such surveys may merely show how gloomy business leaders were in recent months rather than tell us anything about the future.
Trump and Trudeau
Surely if the economy went into a sudden tailspin due to some outside shock, Poloz would be justified in cutting rates. But there are good reasons why the Bank of Canada would not want to lower interest rates without a strong negative signal.
One is our growing trade surplus with the United States. President Donald Trump and the Democrat-controlled Congress could view a cut as an attempt to further lower the loonie in order to give Canada a trade advantage.
The other reason is the approaching federal election. While there are no rules preventing Poloz from doing what’s right to keep the economy stable, central banks are supposed to be non-partisan and are loath to be seen interfering in politics.
An interest rate cut might be seen as a helping hand to the party in power, or used as evidence by government opponents that the economy is slipping.
In a similar fashion, the closer we get to an election, even a moderate surge in inflation is unlikely to be enough to persuade the bank to intervene.
Whichever direction the Bank of Canada ultimately decides to move, unless it is urgent, homeowners and other borrowers should likely plan on no change in interest rates, at least over the next six months.
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