Bank of Canada Governor Mark Carney is scheduled to deliver a speech on housing on Thursday. Many of his closest observers are hoping that he'll deviate from the theme. They have questions about Canadian monetary policy, and not many of them relate to the state of the real-estate market.
"There is a lack of clarity, at least in terms of the Bank of Canada's intentions," Christopher Ragan, a McGill University economics professor and former Bank of Canada adviser, said in a virtual panel discussion hosted by The Globe and Mail's David Parkison.
The issue is Mr. Carney's apparent willingness to leave the benchmark lending rate at the extremely low level of 1 per cent even though inflation pressures are mounting. For Prof. Ragan and others, this setting is at odds with the Bank of Canada's forecast that economy will reach its potential growth rate - the pace of expansion at which anything faster would trigger rapid inflation - by the middle of next year. If that forecast is true, policy makers should probably be raising interest rates now. The alternative is a sharper, faster increase in borrowing rates than Canadians are used to.
"Is the bank really prepared to do this?" Prof. Ragan asked. "Or does it not believe its own statements about closing the output gap by mid-2012?"
Stéfane Marion, the chief economist at National Bank Financial in Montreal, contrasts the United States and Canada in arguing investors who are betting the Bank of Canada will delay raising interest rates until the end of the year are too complacent.
Federal Reserve Chairman Ben Bernanke said last week that he doubted the recent jump in inflation would persist because unit labour costs are lower than they were before the recession, suggesting there's little upward pressure on consumer prices. That's not the case in Canada. Unit labour costs accelerated at an annual rate of 2.6 per cent in the first quarter, the biggest gain in two years, pushing unit labour costs well above their pre-recession peak.
"This is a significant development that argues for an appropriate policy response by the Bank of Canada to ensure that a rise in inflation does not persist," Mr. Marion said in a note.
Carl Weinberg, chief economist at High Frequency Economics, made a similar observation in a report dated Monday. Mr. Weinberg estimates that the gains in labour costs alone would push the consumer price index to annual increase of 2.6 per cent. The Bank of Canada, of course, aims to keep prices advancing at a rate of about 2 per cent a year.
"For now, the bank seems content to hold rates steady," Mr. Weinberg wrote. "However, do not think the (Bank of Canada) is done tightening this year. At some point, it must address the rising trend in unit labour costs."
Central banks are under no obligation to tell investors everything - and in fact, it is undesirable for them to do so.
But when policy begins to disconnect from the rules of thumb that investors for years have been told to use to understand decision making, then it might be time for some fresh guidance.
Yes, the issues with Greece's budget and the persistence of U.S. unemployment are troublesome, but so troublesome the Canadian economy can't stand a benchmark borrowing rate of 1.25 per cent? Is the Bank of Canada now targeting the exchange rate instead of inflation rate? Is there political pressure to keep interest rates low? These are the questions that are circulating on Wall Street and Bay Street. Perhaps this week some of them will be answered.