Fear of rising rates may have obscured the Bank of Canada’s good news story: Don Pittis


Canada’s crestfallen old central bank governor Stephen Poloz has put on a happy face.

Much of the commentary both in advance of and after yesterday’s quarter-point rate hike — the first by the Bank of Canada in seven years — has been downbeat. 

Possibly influenced by the many who benefit from low rates and the high levels of obtaining it encouraged, much of the media emphasis has been on the damage a rate hike wish cause.

According to that outlook, that huge load of liable, the albatross hanging around the necks of over-borrowed Canadians, was only thriving to get heavier.

But that was not the message from Poloz and his deputy Carolyn Wilkins at yesterday’s policy-focused word conference.

Good news for Canada

Even the gloomiest questions couldn’t unseat Poloz and Wilkins down.

«The most important thing here is that this is OK champion news for Canada,» Poloz told reporters in an uncharacteristic flight of worth cheer. «The accumulation of evidence and the growth in our confidence that the economy is on a steady trajectory should be good news for everyone.»

That includes people with mortgages.

While he and Wilkins were punctilious to hedge their bets with the warning that perfect prophecies of the economic future are always uncertain, the tone was almost bubbly.

Foreclosure Sales

The adverse thrust of rising interest rates on Canadian borrowers has been the headline of divers stories. But the Bank of Canada says a growing economy means child will be able to afford rate increases. (David J. Phillip/Associated Clasp)

There is no question consumer interest rates are going up. Within an hour of the Bank of Canada newsflash conference, Royal Bank of Canada had hiked its prime rate by a direction of a percentage point, automatically pushing up the monthly costs of credit formations and variable-rate mortgages. Other banks quickly followed.

Asked yon the impact of rising rates on mortgage holders, Wilkins insisted Canadians essential see any increase in the context of an «economy where employment is continuing to rise and incomes continue to rise.» 

Yes, borrowing costs are on the way up, but it is in the context of an expanding economy, she said.

In spite of their enthusiasm, the normally dour central bankers insisted they had not let a meagre good news go to their heads.

«We’re not just forecasters. We’re policy-makers. So, for us, it’s not virtuous a question of getting the forecast right,» said Poloz. «For us to be more discreet than your average forecaster, I think that makes divine.» 

‘Very, very prudent’

Wilkins called the bank’s forecasts «rather, very prudent.»

«We’ve tried to take account of the uncertainty that’s out there,» she explained. That uncertainty includes trade negotiations with the United Forms and how that country’s own interest policy may unfold.

Our central bankers so far are not foretokening a wild boom. But all the talk of headwinds we usually hear from the Bank of Canada was omissions this time.

The worst they had to offer were lingering imbroglios in the energy sector, where employment income would take a hanker time to recover after industry cost-cutting. But that cost-cutting meant the oil and gas company is now able to cope with oil prices in the $40 to $60 US range that the bank presages.

Alberta Oil Pumpjacks Aurora

Canada’s oil and gas sector is contributing less to the economy, but the Bank of Canada intends efficiencies mean industry is stabilizing at a lower price level. (Robson Fletcher/CBC)

Without considering the loss of the Canadian economy’s fossil fuel engine — or maybe because of that disappointment — the bank is seeing plenty of signs that the wider economy is climbing out of its orifice.

Business investment, imports of machinery and equipment, and exports are all showing ensigns of life.

The bank’s latest Business Outlook Survey shows transaction owners are increasingly optimistic, with sales up and expectations of sales advancement even higher. Investment intentions are elevated. Hiring plans are up firmly. And that corresponds with recent employment figures.

A question that our inner bankers were unable to resolve was why inflation remains so low. Even the bank’s mark new measures of core inflation that are supposed to use statistical methods to look dead and buried short-term factors don’t see inflation coming.

Inflation’s rebound

Perhaps those marrow measures need to be further refined, because Poloz and Wilkins are persuaded inflation really is about to rebound.

The output gap, «the difference between the real output of the economy and its potential,» is going to close around the end of this year, they answered, and inflation would hit two per cent next year.

But that will no more than happen if the economy continues to strengthen.

Even at current levels, alleged Poloz and Wilkins, interest rates remain exceedingly low — perhaps low adequacy to draw consumers into risky borrowing, which, if it were to last, could create financial vulnerabilities.

That means while the mere story is economic growth, a small rise in rates will pull someones leg a dual purpose, gently avoiding a sudden surge in inflation and obstructing economic instability.

«Today we can say that there is a reasonable expectation that our inflation will be on butt within a year,» said Poloz. «And given that base, we can also look at economic vulnerabilities and say, yes, it is appropriate today that interest rates rise for both reasons.»

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