JEREMY TOROBIN – The Globe and Mail
As the recovery gains momentum, it’s increasingly clear a summer interest-rate hike is in the cards, even if Mark Carney is very unlikely to touch borrowing costs this Tuesday.
And for the first time in more than a decade, one of the Bank of Canada’s most effective tools for signalling to borrowers and financial markets that rate moves are coming – the quarterly Monetary Policy Report – will arrive smack-dab in the middle of a federal election campaign, between the leaders’ debates, no less.
As a result, while the central bank is an independent institution and Mr. Carney will give his assessment of the economy’s progression as he sees it, the Governor’s messaging might be more nuanced and subtle than usual.
There’s not much the central bank can do to keep any element of Wednesday’s report – a forecast paper full of commentary backed by charts, graphs and statistics – from becoming fodder for the campaign, with the party war rooms eager to co-opt any outside “proof” that their approach to the economy makes the most sense. Conservative Leader Stephen Harper might argue that a sunnier outlook shows his party deftly steered the country out of recession and now deserves a majority, or that a cautious tone shows this is no time to change governments. Liberal Leader Michael Ignatieff could point to an improved forecast as “evidence” that the country can afford to forego corporate tax cuts without fear of costing jobs.
That’s all par for the course, and as long as Mr. Carney says nothing that could be construed as actively endorsing a particular position, the rest is out of his hands.
“Politicians may try to leverage whatever the Bank says, but [central bank governors are] independent for a reason – because they need to do what’s right for the economy,” said Eric Lascelles, chief economist at RBC Asset Management in Toronto.
Similarly, David Laidler, a former adviser at the Bank of Canada who is now an economics professor emeritus at the University of Western Ontario, said while Mr. Carney and his rate-setting panel have likely looked at their drafts line-by-line “with a don’t-get-the-Bank-into-political-trouble lens,” they also have to “do it as they see it.”
The real trick for Mr. Carney will be to convey (a) that the Canadian and U.S. economies are growing more quickly than expected, (b) that even though inflation is tame right now it could soon become less manageable without tighter policy and, (c) that Canadians must therefore step up efforts to trim their debt before rates go up – all without thrusting himself into the campaign by giving voters the wrong impression that an endless stream of crushing mortgage hikes, for example, is just around the corner.
Luckily for Mr. Carney, there are still so many trouble spots that could trip up the global recovery (Libya, Portugal and Japan, to name a few) that there’s little urgency to raise rates right now.
The central bank wouldn’t hesitate to move rates mid-campaign if it felt that were absolutely necessary, as it did in October, 2008, when Mr. Carney joined other Group of Seven policy makers in a co-ordinated, surprise reduction after Lehman Brothers collapsed. But in the current context, when it’s still a judgment call, and with the loonie well above parity with the U.S. dollar, it’s hard to imagine Mr. Carney taking the risk of being accused of interfering with the election.
Though most economists say the next increase is more likely in July than in May, the quarterly forecast is one of the better opportunities Mr. Carney will have between now and then to reinforce the message that rates are lower than he’d like them to be. The report – which will undoubtedly include upgraded forecasts for the Canadian and U.S. economies, if not the rest of the world – could also show that the central bank expects the slack left in the economy by the recession will be taken up much sooner. That would imply a faster-than-expected path back to a more normal footing.
Most economists say the “neutral” rate for monetary policy is somewhere between 3 and 4 per cent. In theory, Mr. Carney needs to boost his benchmark from the current 1 per cent to something like neutral before the slack in the economy is all gone or else inflationary pressures could get out of control. The last forecast in January said that breaking point would be at the end of next year, but many analysts now predict it will come sooner.
In a sense, Mr. Carney has spent much of the recovery walking a fine line between a strengthening domestic economy and on-again-off-again rebounds south of the border and across the Atlantic. Since October, when he paused after three consecutive increases, the Governor has repeatedly said “global uncertainties” warrant caution. At the same time, he has urged households to slash their debt before it becomes more costly, hinting that if Canada was not an export-driven economy, he would be raising rates much faster.
Still, Mr. Carney’s poker skills could be put to the test on Wednesday, when he and senior deputy governor Tiff Macklem hold a press conference in Ottawa to answer reporters’ questions about their forecast.
In keeping with standard practice at the central bank, Mr. Carney scrapped a press conference he was scheduled to hold in Calgary just days after the election was called. The MPR press conference, however, takes place no matter what.
It’s pretty far-fetched to imagine Mr. Carney, who has more than earned the extraordinary amount of respect he enjoys among his arm’s-length political masters, becoming another John Crow, whose laser focus on inflation was blamed for Canada’s last recession and who was pushed out by the Chrétien Liberals after the 1993 election.
But fears of rampant rate increases would make the electorate much more volatile, hurting the Conservatives more than anyone, as they are the incumbents.
That means even if central bank watchers can glean from Mr. Carney’s forecast that a number of rate increases are on the way, he’ll probably wait until well after May 2 to spell that out.
