Will Mark Carney still be the world's most hawkish dove tomorrow? - Macleans.ca

Will Mark Carney still be the world’s most hawkish dove tomorrow?

A preview of the Bank of Canada’s interest rate announcement


That the Bank of Canada will keep the overnight rate steady at one per cent tomorrow is a matter of almost scientific certainty. If there’s anything to discuss at all, it’s whether Governor Mark Carney will continue to be the most hawkish of dovish central bankers.

In other words, will the BoC maintain its stance that the next rate move, whenever that may be, will be a raise? The bank has been warning since April of last year that interest rates are headed nowhere but up. The exact words were:

In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term. 

Though the Bank toned down its wording as the economy slowed in the latter part of the year, it has kept some version of that warning in every rate announcement since, alone among major central banks to maintain what monetary policy nerds call “a tightening bias.”

But will Carney keep those crucial few words in tomorrow’s interest rate statement considering we now know the economy has been pretty much stagnating for the latter half of 2012?

Hard to say. On the one hand, dropping any hint to rising interest rates would likely further depreciate the Canadian dollar, which has already been weakening on the back of our grim GDP numbers. And that, of course, would help exports.

On the other hand, Carney has been adamant that interest rate policy always be used as a tool aimed at the domestic economy, not exchange rates. (The governor is a staunch defender of the Federal Reserve and now the Bank of Japan’s aggressive money-printing, which some view as a stealth effort to weaken the greenback and the yen. Carney’s argument is that any spillover effects of U.S. and Japanese monetary policy on their respective exchange rates is unintended.)

More importantly, Carney has a very good domestic reason to retain his tightening bias: restraining the borrowing instincts of Canadians. True, as the BoC tirelessly points out, household credit growth has been moderating, but levels of indebtedness remain dangerously high. And despite recents rounds of mortgage rule tightenings, it’s unclear whether the borrowing binge will resume, if interest rates stay at rock bottom for a while longer. Dropping all warnings of a future interest rate hike might be risky.