Finance Minister Jim Flaherty says Canada will face global pressure to raise interest rates in 2014, as the United States begins to step back from its policy of extraordinary economic stimulus through intervention in bond markets.
The decision by the U.S. Federal Reserve to move away from its quantitative easing policy – in which the central bank creates billions of dollars to buy financial assets each month – comes amid signs the American economy is beginning to heat up, which would boost demand for Canadian imports.
At the same time, Bank of Canada Governor Stephen Poloz has signalled rates in this country aren't likely to change for some time, as the bank juggles the risk of excessive borrowing by Canadians against that of sluggish inflation.
But the Fed's reduction of quantitative easing, dubbed tapering, adds to pressure from the Organization for Economic Co-operation and Development and International Monetary Fund for Canada to hike rates, Mr. Flaherty said Sunday.
"I think the pressure will be there, because the Fed in the U.S. should stop printing money, and taper off as they say," Mr. Flaherty, referring to the dialling back of U.S. bond-buying, told CTV in an interview aired Sunday. "The OECD and the IMF have both said to Canada we ought to let our interest rates go up a bit. So there'll be some pressure there for that to happen."
Mr. Flaherty stopped short, however, of saying what he thinks Mr. Poloz should do, with the minister's spokeswoman saying Sunday that's the "domain of the Bank of Canada."
With soaring personal debt levels and a heated housing market, any rise in interest rates could deliver a sharp jab to the Canadian economy. Last month in Montreal, Mr. Poloz stuck with the status quo of an official policy rate of 1 per cent, saying rates will "stay where they are for quite some time."
However, a November OECD report said Bank of Canada interest-rate hikes "may begin by late 2014 to avoid a buildup of inflationary pressures." The OECD projections assumed the rate would be hiked in late 2014 and raised to 2.25 per cent – more than double its current rate – by the end of 2015.
The IMF said in October it expected Canada to consider raising rates, or a "gradual tightening" of monetary policy, in late 2014. But the IMF also said in a report a month later that the Bank of Canada "can afford to wait before starting to raise policy rates towards more normal levels," but that policy makers must "remain vigilant against the potential risks" of keeping rates low, such as pension funds' "increased reliance on non-traditional investment strategies."
Mr. Flaherty also said Sunday that Mr. Poloz had indicated to him there could "be some softening in the dollar," as compared to the U.S. dollar, something the Finance Minister signalled he'd welcome, to some extent, as a boost for exporters. "But the [Canadian] dollar in the 90s somewhere, it's good for manufacturing and we can still travel reasonably," Mr. Flaherty told CTV. The dollar is currently around 94 cents U.S.
The Canadian Manufacturers and Exporters trade group is relying on Bank of Canada forecasts of a dollar in the 92-cent to 94-cent range. "This is an advantage for Canadian exporters because it will create relief in costs and increases in sales," Jeff Brownlee, the CME's vice-president of public affairs, said in a statement Sunday. The group continues to urge Canadian companies to plan for a dollar at par, however. "That way they are not just competitive and more efficient, but making more money," Mr. Brownlee said.
Monetary policy, such as interest rates and the dollar, are the Bank of Canada's turf, not that of Mr. Flaherty, so it's uncommon for him to comment on the subjects. Through his spokeswoman on Sunday, he declined to comment further. NDP Finance Critic Peggy Nash said it's "disturbing" that Mr. Flaherty is wading into a subject area that's the responsibility of Mr. Poloz.
"He doesn't want to leave any question about the independence of the Governor of the Bank of Canada, but we have a situation under the Conservative government that has allowed record household debt … and the bank is really caught between a rock and a hard place, because these high debt levels create pressure for higher interest rates, but inflation is very low. So they've created a climate that's very difficult for the bank to act," Ms. Nash said.
Mr. Flaherty also said Canada remains on track to balance its budget for the 2015-2016 fiscal year – and Canadians are due to go to the polls in the fall of 2015. "Yes, we'll balance. And it won't be close. We're in good shape," he told CTV.