Is a rate hike worth the risk?

What to look for in tomorrow’s BOC announcement

(Sean Kilpatrick/CP)

What’s there to see in tomorrow’s interest rate announcement by Bank of Canada Governor Mark Carney? More than one might think.

Although the BOC is sure to keep the target for the overnight interest rate at one per cent, where it’s been since September 2010, everyone will be scouring the governor’s prepared remarks looking for something that sounds somewhat like this: “Some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”

That’s a quote from Carney dating back to April 2012. It represented a clear signal to the markets that the Bank was feeling relatively good about Canada’s growth prospects and might hike rates sooner rather than later. Some version of that warning to investors has appeared in every major BOC statement since, but that hawkish tone was nowhere to be found in the governor’s most recent speech, on Oct. 15.

Instead, the governor said the Bank would give ample notice when the moment would come to think about raising interest rates again: “If we were to lean against emerging imbalances in household debt, we would clearly declare we are doing so and indicate how long we expect it would take for inflation to return to the 2 per cent target.” Given last week’s weak inflation numbers, though, it’s anyone’s guess whether tomorrow’s announcement will contain such a reference.

Some, in fact, are even calling for lower interest rates. In the Globe and Mail, Mike Moffatt takes a look at historically low bond yields and argues we need a 0.25 per cent cut:

Bond markets are screaming loud and clear that worldwide demand remains low, and, in the medium-term, inflation is likely to stay under the Bank of Canada’s target. On Tuesday, the Bank of Canada will be giving its interest rate announcement. Given the current economic data and low inflation, the prudent move for Mark Carney is to lower the overnight rate by 25 basis points.

On the other hand, there are increasingly loud voices calling for exactly the opposite. The Canadian critics of central bank policy are so far abstaining from vicious Helicopter Ben-style monikers, but they aren’t holding their punches.

At the the Macdonald-Laurier Institute, Philip Cross, the outspoken former chief economic analyst at Statistics Canada, writes:

The distorting effects of persistently low interest rates can be seen in everyday life. They threaten the health of financial institutions by encouraging overinvestment in markets like housing in Canada, which could go sour, and causing the investment income of insurance companies to plummet. Low interest rates prevent the destruction of poor investments needed to free up resources … Low interest rates encourage governments to go massively into debt, as we are seeing in the U.S. and Europe, which could prove problematic when interest rates return to normal levels. They penalize savers and investors in growth companies, while rewarding debtors and investors in staid dividend-paying companies, the very opposite of the incentives that economics says maximize long-term growth.

And at Canadian Business Joe Castaldo is openly wondering whether Carney really knows what he’s doing:

Carney’s frequent warnings about debt and the housing market shows he is well aware of the risks. But by talking instead of acting, he also runs the risk becoming another Alan Greenspan, the once infallible guru who infamously stuck to low interest rates and ignored the massive debt and housing bubble he helped create until it was too late. Greenspan’s legacy is now tarnished. It’s hard not to wonder if, a decade from now, we might look back at Carney in a similar way.

Stay tuned for more commentary on the interest rate announcement tomorrow on Econowatch.




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Is a rate hike worth the risk?

  1. And Mike Moffatt’s expertise on this topic is what, exactly?

    • Apparently there are only two economists in Canada.

      • No, lots. Even my sisters took economics classes in high school.

        ♫ Home, home on the range ♫

        My brother and I took industrial arts.

        • Write if you find work. LOL

  2. One commenter responded that I could not credibly discuss the economics profession because I work and have a Ph.D. from a business school and therefore am not a “real economist”. Surprisingly, I do not wholly disagree. As an untenured B-school Prof who spends most of his time in the private sector and prefers taking consulting jobs over writing academic papers I am an odd choice to be the voice defending academic economics departments.

    - Mike Moffatt, Oct 16, 2012

    WCI blog: I’m Glad You Didn’t Take It Personally (the Externalities Edition)

  3. Not much all these years for most people to invest in with such low interest rates.

  4. I wonder why bankers make so much money if they haven’t got the brains or the self-discipline to simply stop lending money to folks who are over-extended. It’s not the job of the BOC to save them from the temptations of the flesh. Remember prudence? Remember sober judgement? Remember responsibility?

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