Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Bank of Canada Governor Mark Carney (Adrian Wyld/Adrian Wyld/The Canadian Press)
Bank of Canada Governor Mark Carney (Adrian Wyld/Adrian Wyld/The Canadian Press)

Top Business Stories

Is Bank of Canada playing with 'inflationary matches'? Add to ...

These are stories Report on Business is following Thursday, June 30. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

Follow Michael Babad and Globe top business news on Twitter

Carney and rates Is the Bank of Canada playing with "inflationary matches" by not budging on interest rates?

It's starting to look that way, says Douglas Porter, the deputy chief economist at BMO Nesbitt Burns.

Mr. Porter was referring to the latest consumer price numbers this week, which showed Canada's annual inflation rate climbing to 3.7 per cent. Not only is it well above the Bank of Canada's target of 2 per cent, it's also above those of Australia, at 3.3 per cent, and rates in Mexico, Colombia and Chile, where the pace is running at 3 per cent or a tad greater.

"At the risk of pounding on a well-worn drum, it looks increasingly like the Bank of Canada is playing with inflationary matches by holding interest rates so low for so long," Mr. Porter said.

"Prior to 2011, Canada had not had a higher inflation than Mexico for any month since the early 1970s, and since the 1960s for Colombia," he said in a research note.

"The difference is that, while these other countries all have short-term interest rates above 4 per cent, ours remains locked at 1 per cent. No question, the economy faces plenty of challenges and deep uncertainties, but even the [European Central Bank]looks poised to grind rates higher again next week (to 1.5 per cent), and it would be tough to find a central bank that faces bigger uncertainties."

The higher-than-expected inflation reading created fresh buzz over when Bank of Canada Governor Mark Carney might hike rates again, perhaps earlier rather than later? Economists had been looking at some time in the fall, or later in the year, or even next year.

Part of the uncertainty relates to global turmoil - that includes Europe's debt crisis and the U.S. soft patch - and the speculation that the U.S. Federal Reserve won't touch rates until well into next year or even into 2013. That puts a certain shackle on the Bank of Canada.

Not everyone agrees that inflation is that big a problem going forward, some believing it has peaked, which would take any pressure off Mr. Carney.

As well, against the backdrop of higher inflation comes a slow patch in Canada, where the economy kicked off the second quarter with no growth in April, according to Statistics Canada today. Add into that evidence that Canadians are pulling back on their spending and a jobless rate projected to remain above 7 per cent for some time yet, and the picture becomes more complicated for the central bank governor.

Avery Shenfeld, the chief economist at CIBC World Markets, says Mr. Carney is looking out a year or so, where the impact of rate decisions would be felt.

"There will be no rush to a panicky interest rate hike in July based solely on the blip in CPI," he said today. "But neither will the bank shy away from raising rates this fall if, as we expect, it gets confirmation by October that the GDP dip was nothing other than the typical swings of fortune for an economy with a reasonably healthy trend pace."

Economy flat Canada's economy stalled in April, kicking off what is projected to be a weak showing for the second quarter.

Gross domestic product was flat in the month, Statistics Canada said today, after growth of 0.3 per cent in March. Both the goods-producing and services sectors stalled, and the auto sector was hit by supply disruptions.

"Significant increases were recorded in mining of metal ore and coal. Retail trade, the public sector, construction and utilities also advanced," the federal agency said.

"However, this growth was offset by declines in manufacturing and, to a lesser extent, in wholesale trade and the finance, insurance and real estate sector. Transportation services were unchanged."

The report was only slightly better than expected, and "we expect May to show similar softness," said Mr.Shenfeld of CIBC World Markets.

"A strong finish in June would put the economy on track for just over 1-per-cent growth, too sluggish for the Bank of Canada to hike rates in July," Mr. Shenfeld said.

Momentum has dwindled from a strong start to the year, The Globe and Mail's Tavia Grant reports today. Observers expect growth to pick up in the last two quarters of this year, even as risks to the global economy - such as Europe's sovereign debt crisis and concern over U.S. debt levels - remain elevated.

Indeed, there is hope that the economy can "regain its mojo" in the second half of the year, added Mr. Porter of BMO Nesbitt Burns.

"With gasoline prices simmering down, auto production poised for at least a partial rebound, and hopefully fewer weather 'events' in coming months, we look for growth to pick up to the 2.5 per cent to 3 per cent range in the next two quarters."

Six months of turmoil After a rocky six months, global markets ended the first half of 2011 on an upbeat note. But they remain on edge amid the troubles of the euro zone, the United States and other regions.

More than a year in, Europe has yet to get a grip on its sovereign debt crisis, and the United States is struggling to come back from a recession that wiped out millions of jobs. Fears over a Chinese slowdown persist. In Canada, consumers are weighed down by hefty debts and high gas prices. And with unemployment still well above 7 per cent, and not expected to fall below that mark for years, many are struggling to find work.

The Federal Reserve's quantitative easing program, an asset buying scheme dubbed QE2, also ends today.

And as for stocks, a whole lot of bupkis.

"The global economy is moving to slightly lower growth, and slightly higher inflation trajectories," Bank of Nova Scotia warns in a new forecast.

"However, the transition has become more turbulent because of the increasingly unsettled conditions around the world triggered by the convergence of a variety of cyclical and structural economic problems in many regions, recurring sovereign debt strains, and ongoing geopolitical problems," Scotiabank economists said.

"The 'rough air' stems from a number of growth-restraining factors. High gasoline prices have undercut discretionary spending around the world. The supply chain aftershocks from Japan's mid-March catastrophe have weakened manufacturing activity internationally. In both the United States and Canada, these factors and a slowdown in hiring have triggered a softening in consumer spending. Intensifying sovereign debt strains in Greece, and the potential for contagion in other peripheral euro zone nations, have added to the weaker economic tone, and roiled financial and currency markets."

So we head into the second half of the year with confidence undermined, though some of the reasons may be temporary, the economists noted, and there are several factors that will sustain the economic rebound.

"The average duration of business cycles in the post-WWII period is about five years," they said. "Virtually every one has a mid-cycle slowdown as the rebound in spending and rebuilding of inventories winds down. The current cycle is mirroring this trend, with the moderation in growth coming roughly two years after the recovery began in mid-2009."

According to a Reuters poll on asset allocation today, investors are slightly more upbeat but still jittery.

The surveys indicate that on average, 58 fund companies in the United States, Europe and Japan have boosted the share of equities in balanced portfolios to 51.5 per cent, compared to 50.7 per cent in May. Bond holdings inched down to 35.1 per cent from 35.5 per cent, and cash to 4.9 per cent from 5.2 per cent.

As of yesterday, when it closed above 1,300 for the first time in a few weeks, the S&P 500 was up by about 4 per cent since the beginning of the year, though not everyone believes that can continue.

"There are plenty of optimists who expect the stock market to go from strength to strength," said John Higgins, senior markets economist at Capital Economics. "However, we continue to expect the S&P 500 to drop back to 1,200 by the end of the year for three key reasons."

Among those reasons: QE2 ends today with no QE3 in sight, a lower than expected outlook for corporate earnings, and stretched valuations.

Separately today, The Conference Board of Canada's consumer confidence reading for June showed Canadians are bummed out. Its index fell for the second straight month, down 2.5 points to 83.1.

RIM reaches agreement with shareholder Research In Motion Ltd. has struck a deal with a shareholder pushing for change at the top of Canada's most important technology company.

Northwest & Ethical Investments LP, after discussions with the BlackBerry maker, withdrew its shareholder proposal to split up the duties of RIM's two co-chief executive officers, who also act as co-chairmen of the board of directors, and to introduce a new, fully independent chair.

Instead, the company has struck a committee to investigate the issues raised by the shareholder proposal and look into whether co-CEOs Jim Balsillie and Mike Lazaridis hold too much power.

German banks strike deal Germany's banks have struck a deal with the government to help out Greece by rolling over a certain amount of the debt they hold. The French government has already taken similar steps.

This comes as Greece's Parliament voted today to pass the legislation to implement the government's austerity program. Politicians approved the overall plan yesterday. The two votes, and a follow-up meeting of euro finance ministers on Sunday, are key to Athens receiving a further €12-billion in bailout money from the EU, European Central Bank and International Monetary Fund.

The developments in Greece have buoyed markets, though, as The Globe and Mail's Eric Reguly reports today, the threat of a credit default is still very real.

"Even if Greek and French banks agree to roll over their debts, however, it is not clear that rating agencies will not put a default rating on Greek debt given the change for the worse in the original indenture terms," said Karen Cordes Woods and Derek Holt of Scotia Capital.

U.S. jobless claims remain high The U.S. labour market seems unable to gain any meaningful traction.

Initial claims for jobless benefits slipped last week, by just 1,000, to 428,000, still well above the 400,000 mark. The four-week moving average inched up to 426,750, the U.S. Labor Department said.

"Another week, another disappointing U.S. initial claims report," said senior economist Jennifer Lee of BMO Nesbitt Burns. "... This report does nothing to reassure anyone that the job environment is improving."

Queen takes pay cut Hard times in Britain are putting the squeeze on the royal family.

The government is overhauling the way it funds the Queen, leading to what is estimates will be the equivalent of a 9-per-cent cut by 2015 when inflation is factored in.

The old system has been in place since 1760, and was markedly changed in 1972. Under the proposed new system, which has to go through Parliament, she would be funded by receiving 15 per cent of the profits of the Crown Estate, a portfolio of properties.

Chancellor of the Exchequer, George Osborne, told Parliament today that by 2014-15 that should be about £35-million, in line with what the household spends, but lower when inflation is taken into account.

There are other measures in the proposal, as well. According to Mr. Osborne, the new regime "balances the public interest that our Queen is properly funded to carry out her official duties and the completely legitimate interest of the taxpayer in proper accountability and value for money."

Britain is in austerity mode, trying to bring into line a budget deficit of about 10 per cent of GDP. Almost 2.5 million are unemployed.

This comes as the latest royal couple, WIlliam and Kate, start their visit to Canada.

In International Business today Nearly three-quarters of banks and insurers in Europe have introduced a system to withhold bonuses from staff if their performance does not match up to expectations, Patrick Jenkins of The Financial Times reports.

In Economy Lab today Give someone an inch and they'll take a mile. It's rare, however, to hear that if you give someone an inch, they'll take that mile, and go in the wrong direction. The Globe and Mail's Julien Russell Brunet reports.

In Personal Finance today Setting up a trust can offer ways to reduce the hit on income, says Tim Cestnick.

These "zombie survival tips" will help you survive a financial disaster.

The Internet abounds with horror stories of young people who take on far more debt than they can comfortably carry.

From today's Report on Business

Report Typo/Error
  • S&P 500 INDEX
  • Updated January 19 4:59 PM EST. Delayed by at least 15 minutes.

Next story




Most popular videos »

More from The Globe and Mail

Most popular