It's hard to know what Canadian Finance Minister Jim Flaherty had in mind when he said that Canada will face "some pressure" from various forces beyond its borders – the U.S. Federal Reserve, the Organization for Economic Co-operation and Development and the International Monetary Fund were all mentioned by name – to start raising interest rates in 2014. There's little in Canada's economic fundamentals suggesting pressure for the Bank of Canada to raise rates, and little justification on that basis for international financial bodies and Canada's trading partners to agitate for higher rates in Canada.
We're not likely to hear Mr. Flaherty explain himself further. He weighed in on the rate outlook – something the government usually steers clear of, noting quite correctly that rate policy is the domain of an independent Bank of Canada – in a recorded interview broadcast Sunday by CTV, and then stopped talking about it as abruptly as he started. His office has indicated he won't wade in further on the topic.
But it's unlikely that this was a slip-up. Mr. Flaherty has been Finance Minister for nearly eight years; in the relatively controlled environment of a one-on-one taped interview, he almost certainly didn't stumble into his comments unprepared.
Perhaps the minister really is perceiving external pressures for Canada to not fall too far behind as other central banks (most notably in the U.S. and possibly Britain) begin normalizing monetary policy from extremely stimulative levels. A big risk for these countries and their still-fragile economies is that higher rate policies will push their currencies upward – at a time when they would prefer their currencies to be relatively weak, to stimulate export growth and even a bit of inflation. That would be easier without outliers fuelling a currency war by keeping their interest rates suppressed – and perhaps they see Canada, whose dollar has taken on an expanded role as a reserve currency in the aftermath of the financial crisis, as as one such potential outlier. (Or, in the case of the euro zone, unwelcome competition in an effort to push the euro lower and revive the stalled European recovery.)
Of course, with Canada's economic growth still tepid and its inflation rate running below 1 per cent, it's pretty hard to make much of a case that the Bank of Canada has some pressing need to raise rates. The argument overseas is far more likely to focus on Canada's overextended housing market and consumer debt levels – suggesting that it's a potential bubble that could disrupt fragile global financial stability, and Canada needs to wield higher interest rates to cool the threat.
Whether this is a convincing argument from the likes of the IMF or not, this may be getting closer to the real motivation behind Mr. Flaherty's candid remarks. As the end-of-year housing data illustrate, Canada's housing dragon is far from slain – and the prospect of extended cheap interest rates isn't helping. The Bank of Canada's recent change in its rhetoric surrounding rates has effectively pushing financial markets' expectations for rate hikes back to the second half of 2015 – a year later than was expected as recently as September. That's a considerable extension of the horizon for cheap mortgage borrowing.
Maybe Mr. Flaherty thinks some rhetoric of his own will tilt the scales back in the other direction a bit. If it works, it could make his job on the housing and household-debt front a little less complicated in the coming year.
David Parkinson