Time for Bank of Canada to stop talking up rates?

Gordon Isfeld | Financial Post Sep 21, 2012 (please see my comments at the end)

OTTAWA — Could it be time for the Bank of Canada to re-write its script?

Inflation has been waning — despite upward pressure from energy prices and higher food costs — while the economy is cooling, as is the housing market.

The central bank, however, has stubbornly stuck to its rate-hike-sometime-but not-quite-yet policy, with very few edits of its statements along the way. Two years on, its key lending rate remains near rock bottom.

Still, policymakers insist this will not last, and that borrowing costs eventually must go up. Others, and the other hand, see little reason to move on rates until the global economic storm clears — and that could be a long way off.

Inflation is the key focus of the Bank of Canada, which uses its lending rate to steer consumer price rises toward 2% — the midway point of its 1%-to-3% comfort zone.

But in August, overall consumer prices rose at an annual rate of just 1.2%, down from a year-over-year advance of 1.3% the previous month, Statistics Canada reported Friday.

The report also showed that core inflation — stripping out volatile items, such as some energy and food products — slowed to 1.6% on annual basis from 1.7% pace in July.

On the same day, the federal agency reported wholesale sales — a key indicator of the health of the economy —fell 0.6% to $49.5 billion in July, after a 0.3% drop in June.

Other data this week showed house prices in Canada rising at a slower pace and sales beginning to decline, due for the most part to the federal government’s recent tightening of mortgage rules.

“With core inflation tracking well below the Bank of Canada’s Q3 forecast, the housing market softening and the Fed stepping harder on the monetary accelerator, rate hikes in Canada remain at least a year away,” said economist Robert Kavcic, at BMO Capital Market.

Financial markets have also factored in a stay-as-you-are rate scenario until late 2013 or early 2014, according to Craig Alexander, chief economist at TD Economics.

Even so, he said Friday’s report is “consistent with the Bank of Canada’s forecast for inflation. They continue to believe inflation will gradually rise over the coming year and the core metric will be close to 2% in roughly a year’s time.”

The data “won’t change the thinking at the Bank of Canada at all, even though the rate of inflation is below target.”

Capital Economics, however, expects core inflation to continue declining in the coming months “as external and domestic risks dampen GDP growth. With unemployment likely to rise as a result, we expect the Bank of Canada soon to drop all pretenses about removing policy stimulus.”

Bank governor Mark Carney will have an invitation-only chat with CEOs and other corporate players on Monday in Ottawa, but he has no public appearances scheduled in the coming month.

So, the next time we hear from Mr. Carney and other bank policymakers will be Oct. 23, when they announce their latest interest-rate decision. That will be followed the next day by the release of their Monetary Policy Report, a quarterly look at the economic factors and price trends behind the bank’s thinking.

The bank’s trendsetting interest rate has been on hold at 1% since September 2010, close to a record low. And the wording of the statements accompanying its rate decisions has not varied in recent months, maintaining that “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”

More key economic data in the coming week could support the view that the bank will tweak — if ever so slightly — the wording of its next rate statement toward a more neutral stance. In other words, watering down the “some modest withdrawal . . . may become appropriate” reference.

On Tuesday, Statistics Canada reports retail sales numbers for July, followed on Friday by the July reading on economic growth.

TD’s Mr. Alexander said “the financial-market focus will be on the [central bank’s Oct. 23] communiqué and the guidance they’re providing about the future.”

“You could certainly make the case for the Bank of Canada to adopt a more neutral set of language in their forward-looking statement, but I don’t think they’re going to.”

OK, let’s put this into perspective. Yes, this record low rate period has been great and we all hope it will continue forever, but what goes down must come up. Less than 5 years ago rates were 5.5% for a 5 year mortgage. As soon as the Central Bank can justify the hike, it will happen. The banks make more money when rates are higher.

If you would like more information,
email me at info@propertyprohets.ca.


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