Departing Bank of Canada Governor Mark Carney deserves the plaudits he has received for steering an effective monetary policy that has kept the Canadian economy growing. But the bank’s economic forecasting record on his watch has been consistently wide of the mark, forcing steep revisions to account for worse-than-expected conditions and calling into question its persistent bias toward raising rates down the road.
It happened again Wednesday, as the central bank slashed its overly optimistic growth outlook for this year by half a percentage point to 1.5 per cent. That’s in line with most private estimates and matches a revised forecast issued Tuesday by the International Monetary Fund.
“It’s true that they’ve been a little bit more optimistic than the consensus [of private sector forecasters], and they continue to be very optimistic, at least for 2014,” said Krishen Rangasamy, senior economist with National Bank of Canada in Montreal. “Governor Carney is probably not going to be remembered for his forecasts.”
In its latest quarterly outlook – the last under Mr. Carney’s direction – the Bank of Canada now predicts growth next year will climb to 2.8 per cent, up slightly from its previous estimate of 2.7 per cent in January. The IMF expects the economy to expand by only 2.4 per cent, matching the consensus.
“It has been true that in this cycle, there have been a lot of disappointments,” said Avery Shenfeld, chief economist with CIBC World Markets in Toronto. “But I think you’d also find that private sector forecasters have been too optimistic.”
The key, Mr. Shenfeld said, is whether that optimism has translated into bad policy decisions. “To some extent, the forecast for the second year is irrelevant unless you believe that it is causing them to steer interest rates inappropriately in the first year. The good news is that although they [the central bank] have been consistently optimistic over what lies ahead for a few quarters, that has not caused them to raise interest rates.”
The bank did come close to acting on its excessive optimism and raising rates in 2012. “But ultimately, they backed away,” Mr. Shenfeld said. “So to this point, those [forecasting] errors have been mostly benign.”
Conversely, though, a more pessimistic outlook might have prompted a new round of interest rate cuts or at least a signal that the bank is reversing course and leaning in that direction.
“What it comes down to is: Should they be cutting interest rates today?” Mr. Shenfeld said. “I’m not sure that would be appropriate. But what they could have done is drop the warning of a rate hike to come.”
That, in turn, would create uncertainty in the markets about the direction of the bank’s next move, which could weaken the dollar and give an assist to exporters, he said.
But it could also prompt consumers to add to their already heavy debt, a long-time concern of the Bank of Canada.
The bank has maintained a tightening bias since Mr. Carney began focusing on the issue of high household debt. More bullish growth forecasts support that stance.
“That’s the last thing they want to do,” Mr. Rangasamy said of a change in the bank’s rate bias. “They don’t want markets to think that they are contemplating lowering interest rates, because they don’t want to fuel that problem [of consumer debt].”