Mark Carney often is asked, either directly or indirectly, how Canadians should invest their money. His usual response is to demur, saying he is the Bank of Canada Governor, not an investment adviser.
In the past few weeks, Mr. Carney has dropped such pretense.
At the London Olympics earlier this month, he twice said during an interview with CTV News that Canadians are plowing too much money into houses, and far too little into "productive assets." And Wednesday in Toronto, Mr. Carney accused Canadian executives of sitting on a vast pile of "dead money," signalling to shareholders that their investments in the country's biggest public companies were underperforming.
Call it unconventional policy on the fly.
While traders tend to fixate on monetary bazookas such as quantitative easing, a less appreciated weapon is the pedestal. Central bankers – at least respected ones – have the power to shift market sentiment through words. That's why the Bank of Canada gathers financial reporters in a locked room an hour or so before each of Mr. Carney's speeches. Those words are carefully chosen, and the central bank doesn't want to see them misinterpreted in haste.
It's worth noting that Mr. Carney's London and Toronto comments were of the impromptu variety. However, that shouldn't diminish their impact. In his time as governor, Mr. Carney has demonstrated a willingness to shoot from the hip, but his aim always is too true to believe he hadn't already visualized his target. Think a gunslinger practising in the mirror.
Mr. Carney suddenly is criticizing the way Canadians are spending their money for a simple reason: He's duty-bound to do so.
The Bank of Canada's explicit job is to keep annual inflation at about 2 per cent; its implicit job is to do what it can within that constraint to foster economic growth and job creation.
There's an unsexy line in Mr. Carney's speech to the Canadian Auto Workers union Wednesday that should give the entire country pause: "While these global headwinds are restraining Canadian economic activity and there are some short-term special factors weighing on growth, current underlying momentum is at a pace roughly in line with the growth of the economy's potential."
What he's saying is Canada's economy is a Corolla, not a Lexus. Modest economic growth of an annual rate of about 2 per cent and an unemployment rate of roughly 7 per cent is all Canada's four-cylinder engine can handle without overheating.
Some economists, including Mike Moffatt of the Richard Ivey School of Business, say the Bank of Canada should cut its benchmark interest rate to give a boost to job creation. Unless the economy takes a sudden turn for the worse (possible), or the Harper government wakes up tomorrow and orders the central bank to target jobs instead of inflation (fantastical), it's unlikely Mr. Carney will lower interest rates.
Another noteworthy remark in Mr. Carney's CAW speech was his description of Canada's recession-fighting strategy. "In the immediate aftermath of the crisis, the broad economic strategy in Canada has been to grow domestic demand and to encourage Canadian businesses to retool and reorient to the new global economy."
Mr. Carney did his part by slashing borrowing costs. But that trick just about has run its course. Canadians binged on mortgages, and the central bank clearly has decided it's time to cut them off to avoid a foreclosure crisis. That argues for higher interest rates.
Yet the second part of Canada's economic strategy – spurring investment – has proven harder than inducing households to borrow and spend. Mr. Carney said Wednesday that eliminating the net financial deficit of Canadian households would leave a $50-billion gap in Canada's economy over two years. "This gap can only be sustainably filled by additional exports and business investment," he said.
For whatever reason, some of the lowest borrowing costs in the developed world have proven insufficient to generate what the Bank of Canada views as a satisfactory level of business activity. If still-lower interest rates risk a financial crisis, a central bank's only option is to say directly where it thinks the economy needs to go – and hope enough of the independent actors who dictate an economy's path choose to listen.