You know you're taking your life in your hands (well, reputation in any event) when you make an interest rate call with one day to go before what is arguably the most important Bank of Canada policy meeting in well over a year. In some sense, it seems like an easy forecast to make seeing as all the economists that toil for the Bay Street banks are forecasting a rate hike Tuesday and the money markets are almost priced the entire way for such a move.
The reason why everyone is bracing for the first interest rate increase the country has seen since July, 2007, is because the Bank of Canada purposefully set that universal expectation in motion when it decided not to drop the reference in its last post-meeting press release back on April 20, 2010, to its long-standing pledge to maintain its accommodative posture at least through to mid-2010.
A lot has changed since that time.
There is no doubt that the vast majority of economic releases before that last press statement, and since, reveal an economy that has sustained the rock-solid momentum so evident in that eye-rubbing 5-per-cent burst of GDP growth in the final three months of 2009. There is also no doubt that underlying inflation is a tad higher than the Bank of Canada thought it would be when it dropped the overnight rate to 0.25 per cent just over a year ago.
But much of the data digested by the central bank, the markets and economists are all backward looking and monetary policy should really be undertaken by looking through the front window as opposed to the rear-view mirror.
If you go back to the summer of 2007, you will see that the coincident indicators of economic activity were firm, but the leading indicators contained in financial market signals were telling central banks to cool their jets on any future rate hikes; think of the mistake it would have been for the Bank of Canada to have carried out any more tightening moves back then.
Yes, yes, there is a case to be made that the current interest rate setting is at an “emergency” level and that the economy is no longer in need of such a huge degree of monetary stimulus. I buy that.
