Mark Carney is keeping all of his options open as he weighs a firmer Canadian recovery against the extreme uncertainty in the global economy.
The Bank of Canada Governor, still the only Group of Seven central banker to raise interest rates this year, is optimistic about the domestic outlook and seemingly unfazed by slower-than-expected growth in the second quarter. But weighing on his mind is the sputtering rebound in the United States, where high unemployment is squeezing consumers.
As he raised his benchmark interest rate Wednesday for the third time in a row, Mr. Carney gave no clear hint as to what he might do next, either at his policy meeting Oct. 19 or after that. That left analysts divided or scratching their heads: Some are now more convinced he will boost the overnight rate again next month, while others believe more strongly that he will stand pat.
As it hiked the overnight rate by one-quarter of a percentage point to 1 per cent, the Bank of Canada said domestic borrowing conditions remain “exceptionally stimulative,” but the global picture is blurred by “unusual uncertainty.” The statement didn’t leave only the economists wondering: Executives said having to guess about how quickly rates may rise is among a clutch of economic concerns making it harder to plan and invest.
“There’s this kind of paralysis in decision-making out there,” said John Hayward, president of industrial pump maker Hayward Gordon Ltd. in Halton Hills, Ont. “People are sitting on their hands. There’s no stability anywhere you look.”
The central bank said in the statement announcing the rate hike that consumption growth will “remain solid” and business investment, which had a decent pickup in the second quarter though the recovery lost momentum, will “rise strongly.” Inflation is neither too fast nor too slow and, policy makers noted, a silver lining of the tepid U.S. recovery is that demand for safer investments like bonds is pushing borrowing costs down, helping consumers and companies.
At the same time, Canada is being held back by the faltering U.S. rebound, and “recent indicators suggest a more muted recovery” there in the near term. As a result, the central bank reiterated that future moves would need to be weighed against the next wave of economic developments.
The Bank of Canada is taking the right approach, understandable in this environment, observers said.
“It would be wrong for us to insist the Bank of Canada make clear what it’s going to do six weeks out, because given the data we have now, there’s a decent chance of making a reasonably big mistake,” said economist Stephen Gordon of Laval University in Quebec City. “It’s a time of great uncertainty; we really don’t know what the smart thing to do is right now. We sort of know that between here and about two years from now we want to be back up to 3.5 or 4 per cent, but we don’t know what the proper path is to get there.” Still, some market players say the difficulty of predicting Mr. Carney’s next move could fuel volatility.
“I think a lot of their synopsis is fair and accurate, but I don’t think there’s an awful lot of guidance,” Peter Lindley, head of investments at State Street Global Advisors (Canada), said in an interview from his office in Montreal. “He’s trying to keep the door as wide open as possible, which could mean we get surprises.”
Mr. Carney’s two-sided decision actually fits with his view that the job of central bankers is to give guidance, not “perfect foresight.” The central banker – tapped for his current job in part because of his deep, inside knowledge of financial markets – hinted more than a year ago that he was looking to make it a bit tougher for investors to predict where interest rates are headed.
“It is important that markets understand how a central bank formulates policy, but that does not equate to perfect foresight,” Mr. Carney said in an August, 2009, speech at the annual gathering of international central bankers and monetary policy experts in Jackson Hole, Wyo.
According to a popular – and credible – theory, too much transparency from the U.S. Federal Reserve Board under former chairman Alan Greenspan contributed to the financial crisis, by causing investors to become less skeptical about economic fundamentals, such as whether U.S. home prices could really keep on rising without an ugly, disorderly crash.
Some executives, while frustrated by the added uncertainty, acknowledged that it is a reflection of the climate in which Mr. Carney is operating.
In Hackett’s Cove, N.S., Nautel Inc. president Peter Conlon said the U.S. radio broadcasters who buy his transmitters are winning advertisers back after the recession, but remain nervous.
“People are waiting for the other shoe to drop,” Mr. Conlon said. “It’s not surprising it looks crazy out there [to Mr. Carney], because it is.”
Bank of Canada statement
What it said: The global economic recovery is proceeding but remains uneven, balancing strong activity in emerging-market economies with weak growth in some advanced economies.
What it signals: Uncertainty rules, particularly in the United States, where the recovery is faltering, meaning more headwinds for Canadian exporters.
What it said: Consumption growth is expected to remain solid and business investment to rise strongly. Both are being supported by accommodative credit conditions, which have eased in recent weeks mainly owing to sharp declines in global bond yields.
What it signals: Consumer and business spending are shaping up to be strong points in Canada, meaning the private sector and privately driven demand are filling the void being left by the fading impact of government stimulus spending.
What it said: As a result of monetary policy measures taken since April, financial conditions in Canada have tightened modestly but remain exceptionally stimulative.
What it signals: Three rate hikes of 25 basis points each have made it more expensive for Canadians to finance variable-rate mortgages, floating-rate loans and lines of credit. But the current 1-per-cent benchmark rate is far from what economists consider “neutral.’’
What it said: Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.
What it signals: A small tweak on the face of it, but the all-important last line of the statement sounds an arguably more worried tone than in past statements because the two previous versions referred to “considerable” uncertainty. This suggests the bank’s stance has shifted somewhat to one where it would need to see a sufficient amount of positive economic data before hiking again.
