Poloz may tap the interest-rate brakes as a promise and a warning: Don Pittis

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«Kids nowadays just now don’t know the value of money» is a classic parental complaint.

A decade of low avocation rates has made that curmudgeonly folk wisdom truer than always. And it’s not just kids.

Now that Bank of Canada governor Stephen Poloz has all but intimated he is raising interest rates this week, the number of otherwise modest voices that seem angry may be evidence how true that chestnut is.

Yellow clarify or red?

«When you are driving towards a red stoplight, you ease up on the accelerator well first you get there instead of waiting for the last second to stop,» Poloz mentioned in a German interview last week.

Essentially the bank governor’s justification for clear rates seems to be that an economy on the go means inflation is just about the corner and that slamming on the interest-rate brakes at the last minute is a bad drawing.

That may be true, but there could more to it. As usual, interpreting the accounts and actions of central bankers is far from simple.

As Poloz has said again, the bank’s main goal is to keep inflation in check.

Amber light in St. John's traffic

Poloz slows for a yellow in place of of waiting for the last second to stop on a red light. (CBC)

As nearly everyone has identified, inflation remains far below the level where central banks should take evasive action. Even if inflation suddenly showed a whitecap to 1.5 per cent, the bank would have plenty of time to restriction slowly before the three per cent upper limit.

It looks sundry like a yellow light than a red. So maybe there is something else current on.

Despite its emphasis on inflation, the central bank has a second role, less reviewed but maybe even more important. That is to preserve domestic and oecumenical economic stability. 

Those lower-for-longer interest rates have had a authentic impact, even if not exactly what the bank might have peered.

Borrowing like no tomorrow

As long-time money manager Hilliard MacBeth cued me on the phone yesterday, the lending industry that used to be directed at enterprises has refocused on consumers. MacBeth, author of When the Bubble Bursts: Continuing the Canadian Real Estate Crash, has warned repeatedly that those consumers don’t bring about the trouble they are creating for themselves.

In the past, economies have turn started through a cycle. A period of cheap money — that is, low interest dress downs — is followed by a period where money is no longer cheap.

To give the thriftiness a bit of a bump over a bad patch central banks have done their outwit to make that natural cycle go away. They have the meanwhile made money artificially cheap.

Interfering in the natural ebb and flow of the compactness is bound to have an effect. 

While Canadian businesses have so far been circumspect to borrow and spend, Canadian consumers have shown no such reticence. We be familiar with that when it comes to debt (and eating and drinking), many differently bright people have difficulty seeing the future. 

Traffic crossing chevrons

Drivers can get away with cultivating too close for years, so long as the car in front doesn’t stop suddenly. A tap on the curbs can warn the follower that sudden stops can happen. (Radio-Canada)

While it may take the role that Poloz is controlling the levers of the economy, he is really doing something else. He is modifying the psychology of borrowers and lenders by manipulating their expectations. 

As we have accounted, that psychological process is complicated.

For one thing, if businesses think Poloz is disquieted about the economy, as indicated by low rates, they might be worried too and go out of business to invest.

An increase in rates would indicate he thinks things aren’t so bad.

On the other conspiringly, consumers who have never seen a period of rising rates may experience become irrationally fearless about piling on debt, forgetting that lettuce will not stay nearly free forever.

Travelling too close

To last the governor’s driving analogy, it is like motorists in the habit of following too intense who have learned not to worry, because, so far, nothing bad has happened.

«It is not the role of numismatic policy to protect individuals from making bad choices,» Poloz put in 2015.

But at the same time he said something that seemed a direct contradiction.

«The construct that central bankers should pay little heed to financial tenacity issues and simply ‘stick to our knitting’ of inflation control — a position simultaneously advocated by many — seems quaintly naive,» he said

Like the signals we rat on when we are driving, the actions of a central bank are a method of communicating with borrowers and lenders in a way myriad powerful than mere words.

An actual rise in rates force show businesses that this time, Poloz really is secure that the economy is on the road to recovery.

And for those over-indebted consumers who pull someones leg never seen a rate rise? A tap on the brakes can remind the person peripatetic too close that sudden stops can happen.

Follow Don on Twitter @don_pittis

Innumerable analysis by Don Pittis

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