The Bank of Canada now has plenty of ammunition to justify (at long last) removing its tightening bias when it issues its latest interest-rate policy statement Wednesday morning. But it won’t. The reasons may be sound, but the timing is not.
First, the sound reasons – some of which are hot off the presses.
On Tuesday, the Bank of Canada published monthly data showing that household credit in April posted its slowest year-over-year growth in 17 years. Outstanding balances in both mortgage and non-mortgage debt declined; mortgage debt is now growing at its slowest pace since 2001. The overall pace of household credit growth is now 4.1 per cent year over year – roughly half of what it was three years ago, and down from 5.4 per cent a year earlier. Clearly, the efforts by the Canadian government and the Bank of Canada to cool household debt – considered by both to be the biggest risk to Canada’s financial stability – are working.
Also on Tuesday, Statistics Canada reported that corporate profits in the first quarter slumped 1.2 per cent from the fourth quarter, and 3.3 per cent from a year earlier. The lack of profit momentum bodes poorly for both employment and business investment, suggesting tenuous traction for economic growth in the coming months.
Toss in last week’s flat retail sales numbers for March, and the recent consumer price index report showing core inflation dipped to a thin 1.1 per cent in April, and you get the picture. The economy is hardly in need of even the threat of higher interest rates – and the household debt numbers suggest that the threat isn’t so much needed to keep consumers in line, either.
Still, don’t expect the Bank of Canada to fiddle much, if at all, with its language surrounding the tightening bias (which it has already weakened earlier this year). For the record, this is the bank’s formal position on the matter:
“With continued slack in the Canadian economy, the muted outlook for inflation, and the constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.”
Not exactly strong wording as it is, but the implication is that the current historically low level of the bank’s benchmark interest rate will eventually undergo “modest withdrawal,” i.e. be increased. The language pointedly does not discuss the possibility of taking rates lower. This is what passes for a tightening bias these days.
Why cling stubbornly to this, given that conditions hardly call for rate hikes on the horizon? Because the Bank of Canada is in a bit of a personality change, that’s why.
This is Governor Mark Carney’s final policy statement, before he hands over the reins to Stephen Poloz. The last thing he’s going to do is saddle the new guy with a policy shift on his way out the door, and then force him to live up to it immediately upon taking the job. It’s bad form, and it would give Mr. Poloz little room to make his own assessments and chart a new path.
So, we’ll wait. Mr. Poloz is slated to give his first official speech as the new Governor on June 19 (in Oakville, Ont., of all places); there is where we might get our first hints of how he views the economic conditions, and whether his policy bias might tilt in a different direction than Mr. Carney’s. After that, we wait patiently until July 17 – the next Bank of Canada interest-rate policy statement.
If the economic data haven’t shifted course by then, we may finally say goodbye to the long-in-the-tooth tightening bias.