Poloz says Canada's economy in 'sweet spot'; warns of cryptocurrency's allure
Bank of Canada Governor Stephen Poloz says Canada's economy has reached a point of near-perfect balance, with most companies running at full capacity and inflation nearing the central bank's elusive 2 per cent target. But Mr. Poloz says, what keeps him awake at nightare household debt levels, lagging youth employment and cyber threats. During his speech in Toronto Thursday, he also said the bank would continue to be "cautious" and "data dependent" as it ponders its next interest rate decision.
One of the things that worries Mr. Poloz is households' debt loads, which rose to another record high in the third quarter. This came as mortgage debt continued to climb despite rising interest rates. Statistics Canada reported the ratio of household credit-market debt to disposable income rose to 171.1 per cent in the three months ended Sept. 30.
Today's rate hike was a rear view mirror move, but the Bank of Canada hints that the view out the front window isn't quite as sunny. Canada did so well in 2017 that it left little slack in labour markets or capacity in its wake, easily justifying a quarter point hike today, and we share the Bank of Canada's view that higher rates will be needed over time. But perhaps not as fast and furious as the market was starting to think. The Bank's statement put NAFTA uncertainties right up front in their statement, and also explained that "monetary accommodation" (ie. rates at stimulative levels) will be needed to reach their growth and inflation forecasts, reasserting the need to be cautious in how fast they hike ahead. Overall, this was a dovish statement relative to the minimum degree of optimism needed to justify a rate hike today, and could put some downward pressure on 2 year yields and the value of the C$.
Bank of Canada exploring closer ties with Ottawa to counter future economic slumps
The Bank of Canada is exploring the possibility of working more closely with Ottawa to co-ordinate interest-rate relief with government spending to counter future economic slumps. The proposal comes as the central bank lays the groundwork for the next scheduled five-year renewal of its 2-per-cent inflation target in 2021. The bank is facing a series of emerging risks that could make monetary policy less effective when the next shock hits, deputy governor Lawrence Schembri warned in a speech Thursday to the Manitoba Association for Business Economists. Higher levels of household and government debt, a long-term decline in interest rates and slow growth are all making the job of central banks more difficult, Mr. Schembri pointed out. Real – or after-inflation – interest rates have slumped to near zero from more than 6 per cent in the early 1990s.
Where did higher rates for savers go? Right to the banks' bottom line
"If there is any suspense about whether the Bank of Canada will raise interest rates on Wednesday, it's strictly from the borrower's point of view. Whether the central bank leaves rates untouched or raises them, it makes little difference to savers. Dynamite couldn't break the impasse in banks delivering meaningfully higher rates on savings accounts. Since last summer, the Bank of Canada has increased its trendsetting overnight rate by a cumulative 0.75 of a percentage point. The banking-industry consulting firm McVay and Associates calculates the average increase in high-rate savings account rates over that span as 0.13 of a point." – Rob Carrick
Cooling growth left little reason for central bankers to rush another rate hike, but US steel and aluminum tariffs sealed the deal. Governor Poloz decided the outlook warranted a cautious approach, leaving rates unchanged and striking a dovish tone in his communique. The statement highlighted that trade policy developments are a growing source of uncertainty, clouding the outlook for the economy and building on what has been a disappointing run in export growth even outside of the noise surrounding US protectionism. Tighter housing policies and the need to assess the effects of past rate hikes also call for a patient approach from the Bank, as does the mention that business investment will add to capacity, thereby signaling less pressure on inflation. So while inflation will outstrip the Bank's own forecasts early this year, there appear ample reason for central bankers to remain on the sidelines. As a result, we're sticking to our call that the BoC only hikes interest rates once more in 2018.
There are worries ahead, growth hasn't been stellar, but the backdrop has been just good enough for the Bank of Canada to nudge rates a quarter point higher. A statement announcing a rate hike has to sound hawkish enough to explain why the move was necessary, and this one met that mark by citing stabilizing housing, better exports and capital spending despite trade tensions, and roughly 2% growth ahead. Inflation will be allowed to run above the 2% target by a few decimal places through 2020, but the Bank notes that their measure of wages is still contained. There's nothing much new in the MPR growth forecast, with a decimal place added to 2019 and 2020 in line with the Bank's upgraded view on the economy's non-inflationary potential. Overall, with the statement retaining the call for gradually higher interest rates ahead, guided by upcoming data, there isn't anything surprising to us in the message, but those who somehow thought the Bank could sound dovish while hiking rates on the same day may be a bit disappointed. That could take the C$ and short term bond yields a touch higher.
The Bank of Canada has taken itself out of the rate hike game, and its message today suggests that it isn't quite as sure about when it will come off the sidelines and hike again. As we expected, the rate message wasn't that they were done for good, but rather, that the timing will be a bit more extended, adding the words "over time" to the paragraph that refers to the need to get rates into the neutral range. Growth for this year was revised to 1.7% (from 2.1%), but bumped up two ticks for 2020, but remember, that's likely under the assumption that interest rates won't have risen as quickly as in their last projection. The drag on growth vs. the prior forecast is spread across consumption, and capital spending the text highlights that the source of the revision lies in the downward expectations for the energy sector and some concerns over global growth. The Bank also thinks there was a slight output gap in Q4 2018, as opposed to the prior view that slack was at zero. On the hawkish side, they are still citing the same 2.5 to 3.5% range for the neutral rate. With the Bank continuing to say that rates will have to rise to that range, the statement is more hawkish than what markets were pricing in, so the statement is bearish for fixed income markets and slightly bullish for the C$
The Bank of Canada left its key interest rate unchanged at 1.75 per cent today, as widely expected (for subscribers). The central bank also warned the current economic slump will be longer and deeper than had been expected, raising fresh doubts about its promise of more interest rate hikes.
Trade figures for December released today underscore how low oil prices are battering Canada’s export-dependent economy, pushing the trade deficit to $4.59-billion, a record high
Bank of Canada says household debt, housing worries easing but raises other concerns
Threats to the financial system from household debt and home prices have “declined modestly," the Bank of Canada said in its 2019 Financial System Review. That’s because people are borrowing less, while the country’s two hottest real-estate markets – Toronto and Vancouver – have cooled in response to higher interest rates and stricter mortgage rules.
But the central bank raised other worries, including the probability of a severe recession, which it says is “elevated and increasing.” It blamed the deteriorating risk environment on slower economic growth, trade tensions and weakness in the oil and gas sector. Other concerns include rising corporate debt and risks related to climate change.
Low global interest rates ‘likely to persist’, but Canadian economy is ‘thriving’, BoC’s Poloz says
Bank of Canada Governor Stephen Poloz said historically low interest rates will likely be the norm for some time as several factors conspire to keep the global economy in a period of slow growth.
He listed slowing population growth, subdued productivity gains, trade conflicts and the emergence of nationalist policies around the world as factors holding back global growth.
In his speech in Toronto today, he said his comments are focused on the longer-term view and should not be interpreted as a signal of the bank’s next moves on interest rates. Earlier this month, Poloz said he would step down as governor when his term is up in June, 2020.
He ended his remarks by describing the Canadian economy as “thriving” and operating close to capacity.