Mark Carney forged a name for himself in the midst of a global crisis. Now, he faces another difficult series of challenges in charting a new course for Canada and fending off inflation without derailing the economy.
For market watchers, the question is how he plans to do it.
In 27 months on the job, this Governor of the Bank of Canada has never raised rates. On Tuesday, he may have to.
For most of his tenure, it is no exaggeration to say that Mr. Carney has been in crisis mode. In May of 2009, he dropped the Bank of Canada's benchmark interest rate to 0.25 per cent - the lowest it can go without upsetting short-term money markets - and made a conditional pledge to leave the overnight target there for at least a year.
So how he will approach the more mundane job of managing inflation remains an open question. With indicators showing that Canada's economy is moving beyond recovery and into a period of expansion, that's about to change, perhaps this week when the central bank announces the results of its latest interest rate decision.
"What we are going to find out in this meeting is how Mark Carney plans to conduct monetary policy," said George Vasic, a strategist at UBS Securities Canada Inc. in Toronto. Now that Canada's central bank is "coming out the other side" of its long battle with recession, investors are keen to know "what are the actual actions [Mr. Carney]is going to take and how he plans to communicate those actions, if he plans to communicate them at all."
According to a survey of 27 economists by Bloomberg News, 25 predict a quarter-point increase and two forecast no change. The people with actual money at stake are less certain. Last Friday, the rates investors were paying on one-month interest rate swaps suggested a 75-per-cent chance that the Bank of Canada will increase the overnight target to 0.5 per cent.
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Those predictions aren't as solid as they seem. About a week ago, markets had priced in only a 50 per cent chance of an interest rate increase. Surveys of economists have been all over the map, from near universal certainty that rates were going up in June after the central bank ended its conditional commitment on April 20 to more equivocal stances as Europe's debt crisis caused global stock markets to plunge and the euro to sink some 7 per cent in May alone.
"Markets are expressing uncertainty about the Bank of Canada's decision Tuesday," Andrew Tilton, an economist at Goldman Sachs in New York, wrote in a note to clients Friday. "What had looked to be a clear case for a rate hike … has been thrown into doubt given the volatility in markets and uncertainties about the impact of the debt crisis in the European periphery on growth."
There's reason to think Mr. Carney wants to keep economists and investors on their toes. In an August, 2009, speech at a conference hosted by the Kansas City Fed in Jackson Hole, Wyo., Mr. Carney argued that group-think contributed to the financial crisis as too many people believed they knew where interest rates were headed. This led to mass complacency that kept investors from properly interpreting data suggesting trouble was brewing. The Federal Reserve and other central banks contributed to this by telegraphing their intentions.
"They have to leave the door open for different options," said Stéfane Marion, chief economist at National Bank Financial in Montreal. "Once you start on the path of normalization, how will the Bank of Canada give guidance? That's more important than the actual rate hike."
Both Mr. Marion and Mr. Tilton predict the Bank of Canada will raise borrowing costs Tuesday, citing an economy that is growing at an annual pace of about 6 per cent and inflation that is hotter than the central bank had factored into its latest assumptions.
The argument for standing pat is on display on the other side of the Atlantic Ocean. After Tuesday, the Bank of Canada's next interest rate announcement is scheduled for July 20. Waiting until then would allow Mr. Carney to gauge whether European policy makers have contained their debt crisis.
It would also allow the Bank of Canada to show solidarity with the European Central Bank and the continent's finance ministers, who are trying to maintain confidence in the $1-trillion (U.S.) financial backstop they erected last month to ease pressure on European interest rates. A decision by a fellow Group of 20 member to go its own way when so many are worried about another credit crisis could send an unintended signal to skittish investors, said Mr. Vasic, who predicts the central bank will leave the overnight rate unchanged Tuesday.
"There is the domestic aspect to running policy, and there's the we're-all-part-of-a-global-team-here aspect to it," said Mr. Vasic, adding that predicting Tuesday's decision correctly is of little importance because the path Mr. Carney chooses will reveal much about how he will approach policy in the future.