Bank of Canada Governor Mark CarneySHAUN BEST
Bank of Canada Governor Mark Carney is entering a crucial phase for clinching the recovery.
Having helped steer Canada's economy out of recession, Mr. Carney and policy makers across the globe are carefully watching for signs that their economies are healing and trying to determine the right moment, and the right pace, at which to start withdrawing the unprecedented stimulus that helped counter the effects of the financial crisis.
While few believe there's much chance Mr. Carney will abandon his "conditional" commitment to keep borrowing costs at a record-low 0.25 per cent through the middle of the year or longer, every piece of economic data over the next few months will be parsed for indications of how quickly rates might rise in the second half of the year and beyond.
Timing is particularly important because no central banker wants a repeat of 1937, when the U.S. Federal Reserve tightened prematurely, snuffing out a tentative recovery and thus prolonging and worsening the Great Depression.
No economist believes the central bank chief is going to adjust borrowing costs Tuesday, and few contend he should be rushing to so much as tweak the wording of the pledge to leave rates where they are unless the inflation outlook changes.
But six months before a July decision which could mark the first rate hike since the crisis, a quarterly economic and inflation forecast this Thursday may offer clues about whether Mr. Carney thinks the recent rebound is here to stay, and how quickly the economy might return to something resembling pre-recession form.
And data on consumer prices this week from Statistics Canada could suggest whether there's any possibility he will need to shorten or extend his holding pattern, the length of which depends on how soon he sees inflation returning to his 2-per-cent target.
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"We've got this confluence of events that may inform us quite substantially in terms of where things are going," Eric Lascelles, a strategist at TD Securities in Toronto, said in an interview.
"There is still a great deal of debate over the velocity of the recovery and whether we race our way back to normal in a very short period of time or slowly work our way back over a longer span," he said. "The Bank of Canada has generally had a very middle-of-the-road view, and it will be very curious to see if they shift that up or down."
Since the bank's last forecast in October, the country's companies have started hiring again and a buying spree in the home resale market, fuelled in part by rock-bottom borrowing costs, forced Mr. Carney to repeatedly insist there is no housing bubble, while also warning that some Canadians are taking on debt they won't be able to afford when rates start to climb.
At the same time, even as domestic demand firms up, economic growth numbers have been tepid - 0.4 per cent in the third quarter, as opposed to Mr. Carney's October estimate of 2 per cent - because the strong dollar is making it that much harder for exporters to sell their goods in the badly damaged U.S. market. Policy makers in October predicted the economy would expand at an annual rate of 3.3 per cent in the final three months of 2009 and 3.8 per cent in each of the first two quarters of this year.
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Doug Porter, deputy chief economist at BMO Nesbitt Burns, said it will be "interesting to see if they're sticking to that robust outlook," citing the currency's continuing pressure on exporters and the fact U.S. companies and consumers are "still swimming upstream."
Plus, last month the economy lost jobs after a whopping gain the month before, and U.S. employers cut another 85,000 workers after a small gain, reinforcing fears about what will happen when the government spending needed to support private-sector hiring runs out.
"Central banks around the world, including Canada's, have to be convinced that the economy isn't recovering only because of very low interest rates and government spending, but has signs of life on its own," Canadian Imperial Bank of Commerce chief economist Avery Shenfeld said in an interview. "Absent job growth, there's no reason to believe the private sector would have the demand necessary to maintain momentum in the face of higher interest rates."
Most economists argue that because markets already expect borrowing costs to go up in the second half of the year, and slowly at that, there's no rush for Mr. Carney to add more detail to his plans for a few more months, assuming economic conditions stay roughly as they are.
Besides, Mr. Carney has managed to damp down a flurry of chatter late last fall among speculators making noises about the need to accelerate interest rate hikes to cool the housing market. Bank adviser David Wolf, speaking on behalf of one of Mr. Carney's deputies, said last week that because the central bank's mandate is to set rates to keep inflation on target throughout the economy, any tinkering in a specific sector, such as housing, is up to the finance minister.
"If the bank were to raise interest rates to cool the housing market now - when inflation is expected to remain below target for the next year and a half - we would, in essence, be dousing the entire Canadian economy with cold water just as it emerges from recession," Mr. Wolf said in Edmonton.
Mr. Carney also got an assist last week from his quarterly survey of Canadian companies, which found there is still plenty of slack in the economy and that executives' predictions for inflation had softened ( . Just as timely, a report by a private association suggested home buyers are exercising caution when taking on mortgages. (
Without a burning need to alter so-called market expectations, economists said Mr. Carney would risk slowing the recovery by sending the currency higher, for instance, if he disclosed an exit strategy too soon, because that could lead investors to falsely believe rate hikes are coming sooner than they are.
"This could be a crucial time in the execution of policy," said David Laidler, a former visiting economist and special adviser at the Bank of Canada who is economics professor emeritus at the University of Western Ontario in London. "This is a great opportunity to start talking about what they're going to do when their conditional commitment to keep interest rates down comes to an end. I've tried to put my head around this problem and, I have to say, I'm very glad it isn't my problem."