Mark Carney says the Bank of Canada’s interest rate guidance is never an iron-clad “promise” and it will only signal the exact timing of monetary decisions in rare and exceptional circumstances.
The central bank Governor warned that in normal times the central bank must always adapt to changing economic conditions.
The bank’s current “guidance” is for “some modest withdrawal” of its current low target rate, which has been stuck at 1 per cent since September 2010 to help the economy recover from the recession.
“This guidance is never a promise,” Mr. Carney warned in a speech to group of financial analysts in Toronto. “Actual policy will always respond to the economics and financial outlook as it evolves. Expectations of policy should do the same.”
And he said that the path of interest rate moves “cannot be predicted with certainty in advance.”
Mr. Carney said the bank’s guidance, aimed in part at curbing record household debt in Canada, may already be working. He pointed out that the share of fixed-rate mortgages has almost doubled to 90 per cent this year as homeowners move out of variable-rate loans to lock in today’s low interest rates before they rise.
Last week, the bank warned that Canadians are still borrowing at a faster pace than their disposable income, making them more vulnerable if they lose their jobs or home prices tumble. The ratio of household debt to gross domestic product now stands at a record high 163 per cent, up from 161.5 per cent in June.
The comments are widely seen as a warning from Mr. Carney that the bank is likely to become less definitive as the economy and financial markets recover from the recession. But Mr. Carney, who announced two weeks ago that he’s leaving to become Governor of the Bank of England in July, seemed to be talking as much to Britons as to Canadians as he laid his thinking on interest rate targeting. He referred repeatedly to “central banks,” rather specifically to the Bank of Canada.
An exception to the rule that guidance is never a guarantee is when conventional interest rate tools have been exhausted and interest rates are virtually zero, or “at the zero lower bound,” as Mr. Carney put it.
In that case, he suggested that the central bank could consider targeting a specific level of gross domestic product. Doing so could be “more powerful” than setting thresholds under its 2-per-cent inflation target.
The last time the Bank of Canada invoked special rate guidance was in April 2009, during the worst of the financial crisis. At the time, the bank promised to keep rates low through the second quarter of 2010.
But he suggested that central banks might need to use more specific targeting in an environment when outsiders, including investors and borrowers, doubt the bank’s commitment to keep rate low even as inflation begins to pick up, and temporarily exceeds its target.
“These doubts reduce the effective stimulus of the commitment and delay the recovery,” he said.