Despite the buzz around Mark Carney since he was named chairman of the Financial Stability Board last month, the Bank of Canada chief's first interest-rate decision since being tapped for the global post will be overshadowed by the crisis in Europe.
On Tuesday, the central banker will almost certainly keep his benchmark interest rate at 1 per cent, where it has been for more than a year. Even though the labour market has turned out two consecutive months of job losses, and even though Mr. Carney has warned that Europe's debt drama could trigger a global credit freeze-up, anyone anticipating a surprise rate cut should think again.
To be sure, Mr. Carney has surprised markets before, like during a six-week span in 2008 when he lowered Canadian interest rates by 50 basis points (0.5 percentage point) on two occasions, to fortify the economy against the made-in-U.S. crisis that most everyone else was still underestimating.
And on Nov. 23 he told a Montreal business audience that Europe's debt crisis "appears barely contained" and that, as a result, the global outlook has "weakened considerably."
Still, economists say he won't even hint at what might push him to consider a rate cut down the road, opting instead to stress that he has the flexibility to stay on the sidelines and see how things play out. Indeed, observers note, he has been careful to pepper his comments in recent weeks with reminders that while the European mess is scary, its direct impact on Canada has been minimal.
In those same remarks in Montreal, Mr. Carney said while access to credit is becoming strained in Europe, domestic companies are actually finding it easier to borrow funds and expand their operations, thanks to Canada's "well-functioning" financial system and a drop in bond yields.
Moreover, economic growth in the second half of 2011 is coming in stronger than the central bank anticipated in its latest forecast, released on Oct. 26. Also, Canadian households' appetite for cheap debt has started to ebb; easing policy might reverse that trend.
So the smart money is on Mr. Carney staying put, until Europe's dénouement takes shape. Economists increasingly believe the euro zone is headed for a recession. But whether its woes will spur a region-wide banking crisis that spreads to North American lenders, causes global liquidity to dry up, and sparks a worldwide slump that sideswipes Canada, remains to be seen.
"The bottom line is nobody knows the way the European story is going to tip," said Avery Shenfeld, chief economist with CIBC World Markets. "What [Bank of Canada policy makers]have said hints that it would take a [global] recession, or a dramatic financial shock, to convince them to cut rates. The emphasis continues to be that existing rates are still highly stimulative."
Last week, the hope was that the co-ordinated move by Mr. Carney and five other major central bankers to keep the world financial system sufficiently greased rules out a Lehman Brothers-esque scramble for cash that cripples credit markets. (Mr. Carney may give some more detail on that front on Thursday, in a semi-annual assessment of risks to Canada's financial system.) Nonetheless, this week is fraught with risk, particularly on Friday when European political leaders and central bankers are scheduled to meet in Brussels in yet another bid to stem the crisis or, at the very least, inspire a bit of confidence in their ability do so.
"That powwow could be a key determinant of how 2012 shapes up," said Stéfane Marion, chief economist and chief strategist at National Bank Financial in Montreal.
Mr. Marion and Mr. Shenfeld agreed that if the European crisis deteriorates and a global credit crunch is more likely, Mr. Carney will contemplate a rate cut. As Mr. Shenfeld pointed out, the nascent slowdown in household credit growth makes the potential more palatable.
For now, though, don't expect even a hint to this end. Europe is a moving target, and efforts to shore up economies that arguably matter more to Canada are having some effect.
"The euro zone is important from the financial-market perspective, but from a Canadian perspective the U.S. is creating jobs and China is easing monetary policy," Mr. Marion said. "And our two largest trading partners are the U.S. and China."