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business briefing

These are stories Report on Business is following Tuesday, May 21, 2013.

Follow Michael Babad and the Globe's top business stories on Twitter.

The highs of the lows
Listening today to both Mark Carney and Julie Dickson, you get a sense of both the ecstasy and the agony of ultra-low interest rates.

Both the Bank of Canada Governor and the head of the country's bank regulator addressed the issue today, each from different perspectives and each with a warning.

For his part, Mr. Carney cited his aggressive monetary policy as one of the reasons behind Canada's better showing in the financial crisis than that of other developed countries.

But that has to change at some point.

"Stimulative monetary and fiscal policies proved highly effective in supporting robust growth in domestic demand, particularly household expenditures, which grew to record levels," Mr. Carney said in the text of a speech.

"As effective as it has been, the limits of this growth model have been clear for some time," he said in the speech to a Montreal business audience.

"We cannot grow indefinitely by relying on Canadian households increasing their borrowing relative to income. Nor can residential investment remain near a record share of GDP, particularly given signs of overbuilding and overvaluation in segments of the real estate market."

Canada's recession, while harsh, was not as bad as the slumps of the early 1990s or early 1980s in lost output and high unemployment. The jobless level, however, remains above 7 per cent.

Mr. Carney credited a "responsible" fiscal policy, "sound" monetary policy, a "resilient" financial system and a "monetary union that works."

Ms. Dickson, in turn, warned of the potential for trouble when rates inevitably rise.

Like those in most developed countries, interest rates have been at emergency lows for years. And the Bank of Canada is not expected to raise its benchmark rate from its current level of 1 per cent until late next year or early 2015.

And again today, Mr. Carney signalled that the next move will be up, not down, as far away as that may be.

The impact of these low levels, Ms. Dickson said, is being watched closely by the Office of the Superintendent of Financial Institutions.

"When low interest rates first appeared, OSFI saw that the impact was most noticeable on pension plans and insurance companies," Ms. Dickson said in the text of a speech she was delivering in Toronto.

"But a sustained low interest rate environment, especially combined with a flat yield curve, affects the banking sector as well, largely through squeezing net interest margins, which negatively affects revenues," she said, according to her speech to an economic summit being hosted by Bloomberg.

"This environment can provide incentives for banks to grow their earnings asset base by trying to gain market share (a zero sum game), increase fee income activities, reduce expenses, enter new markets, and by increasing the proportion of higher-yielding assets (both in the lending and investment portfolios). Of more concern, products and businesses that are overreliant on low financing costs tend to grow and borrowers are strongly incented to increase leverage."

The Bank of Canada has been saying for some time that the next move in interest rates will be up, not down, even though that's a long way off yet.

Some observers wonder whether the central bank might drop that signal when it meets next week.

"No one can predict when, or how fast, rates will start to climb (or indeed, whether they will fall further)," said Ms. Dickson, who also disclosed that she won't serve another term at the helm of the bank regulator after her current one ends in the summer of 2014.

"Yet dependence on low interest rates can become significant, meaning that transition to higher rates could be very painful."

Ms. Dickson also noted the impact on the housing market, and the record debt levels build up by Canadian consumers in this era of low rates.

OSFI, she added, has been staging "major reviews" of the mortgage portfolios of Canada's big banks, while Finance Minister Jim Flaherty has moved four times to tame the market.

"Consequently, the real estate lending market has been a significant area of focus for OSFI, because of the significant incentives for consumers to borrow and for banks to maintain revenues, the size of mortgage lending portfolios, the concerns about some markets being overvalued, and the possibility that customers' debt serviceability could be masked by low interest rates," she said.

Others, too, have warned about the vulnerabilities of debt-burdened households to withstand an economic shock. The key measure of household debt to disposable income is near 165 per cent, and while debt growth has been slowing, that ratio is expected to hold at about its record level.

Carney warns on Europe
Mr. Carney is also heading to Europe with a harsh warning: Act boldly or face a lost decade.

"Europe remains in recession, with economic activity constrained by fiscal austerity, low confidence and tight credit conditions," he said in the text of his speech.

"Deep challenges persist in its financial system," Mr. Carney added in his last speech before leaving for London.

"Without sustained and significant reforms, a decade of stagnation threatens. Europe can draw lessons from Japan on the dangers of half measures. It is now more than two decades since the Japanese financial crisis erupted. To end its debilitating legacy, Japan has just embarked on a bold policy experiment. Its success or failure will have a major impact on the outlook over the coming years."

He was referring to the moves by Japan's new prime minister and the new top officials at the Bank of Japan, who have unleashed massive measures.

The boost in confidence alone is believed to have helped boost Japan's economy in the first quarter.

Europe, in turn, is in a deep slump, with many of its weaker regions hobbled by high unemployment.

Silver dips
Silver prices slipped again today, but they remain well above the levels after yesterday's plunge.

Silver, known as the "devil's metal," sank to its lowest in more than two years yesterday, though rebounded. Gold, too, took a dip.

"The argument has always been that wholesale money printing has the capacity to fuel asset bubbles along with inflation, and while the jury is out on the former, the arguments for inflation continue to diminish by the day in spite of record low interest rates across the globe," senior analyst Michael Hewson of CMC Markets in London said yesterday as precious metal prices fell.

"Growing evidence of falling inflation in Europe, the U.S. and the rest of the world has prompted investors to lighten their holdings in both gold and silver in the past few weeks as technical weakness has driven prices lower," he added, noting the move by investors from gold and silver into "higher yielding and more risky assets."

Silver, which has dropped by more than 20 per cent this year, could remain troubled, he added.

"If inflationary pressures continue to remain subdued the likelihood of further silver and gold weakness remains quite high given that markets still remain somewhat overweight in both … Given that silver is also susceptible to economic fundamentals the question of weak industrial demand isn't likely to support it either, with the prospects for economic growth remaining weak."

Added Sébastien Galy of Société Générale: "[Silver] is far less liquid than gold and seems to be part of the broad correction in the inflation trade we are seeing."

Silver, notes Patricia Mohr of Bank of Nova Scotia, is one of the most volatile commodities among the 32 tracked by the bank's index.

However, she expects prices to gain next year and in 2015, though there could be "some drag" if gold declines along with the Federal Reserve's quantitative easing program.

"It corrected percentage wise more than gold during the mid-April downturn, possibly over worries over China's industrial output," said Ms. Mohr, one of Canada's leading commodities analysts, who is in China and added that the country's growth is still "quite robust."

She bases her forecast on projected moderate growth in the world economy and stronger industrial demand in electronics, such as mobile phones and flat screen televisions.

Dimon's dual role survives vote
Shareholders pushing to split the top jobs at JPMorgan Chase & Co. lost out in a vote today, meaning Jamie Dimon will thus remain both chairman and chief executive of the leading bank in the United States.

Some 32 per cent voted for the split, though it was not a binding vote, anyway.

The Wall Street giant had been pressing shareholders to leave the status quo, citing the bank's financial heft.

But for those who want to strip Mr. Dimon of the chairman's title, JPMorgan needs a more independent board.

Cook testifies
Apple Inc.'s chief executive officer responded to a scathing report today by lauding the technology giant's value to the U.S. economy.

Tim Cook was testifying to a Senate subcommittee a day after a Senate report citing Apple for escaping taxes by pumping profits into subsidiaries in Ireland.

"We pay all the taxes we owe, every single dollar," Mr. Cook said in his opening statement.

"We not only comply with the laws, but we comply with the spirit of the laws," Mr Cook said. "We don't depend on tax gimmicks."

The tax system, he added, should be changed.

At the same time, Ireland was also on the defensive, saying Washington could not blame Dublin.

"They are issues that arise from the taxation systems in other jurisdictions, and that is an issue that has to be addressed first of all in those jurisdictions," deputy prime minister Eamon Gilmore told a broadcast interviewer.

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