Dodge: Banks in trouble if rates and unemployment rise together
A former Bank of Canada governor is preaching patience amid international trade uncertainty and the “bumps and wiggles” occurring in the global economy.
“Our view is that there are a lot of countervailing forces operating in the United States that will – in the end –mean that a lot of the threatened disruptions do not come to pass,” David Dodge, who is now senior advisor with Bennett Jones, told BNN Bloomberg in an interview on Wednesday.
“So we have tremendous uncertainty at the moment, but we do not build that into a high probability of trade falling apart in the future.”
The key to addressing uncertainty from a monetary policy perspective, Dodge says, is to focus exclusively on the fundamentals.
“I think central bankers really look more profoundly today at the fundamentals of what’s going on in the economy, rather than moving with every bump and wiggle,” he said.
“The market moves with bumps and wiggles. Central banks try to look through things [and] more to fundamentals.”
With the market now expecting an interest rate cut on both sides of the border this year, Dodge said that central banks need to continue to be more data-dependent.
“Clearly, we continue to be somewhat surprised – in North America in particular – at continuing low inflation in the face of high capacity utilization and rather low – historically low – unemployment rates.
“I think it’s that fundamental conundrum that all central banks are struggling with. And it’s why the central bank in the United States and elsewhere – Europe, Canada as well – have said that they’re going to be data-dependent, that they’re not going to be on a route-march towards neutral interest rates, and there is indeed some uncertainty in today’s world on exactly where neutral is.”
But as far as the economic conditions that have prompted some – including famed U.S. portfolio manager Steve Eisman – to short Canada’s big banks, Dodge said the conditions aren’t turbulent enough.
“What we know is that real financial difficulties come when you have a combination of both a slowing economy, rising unemployment and at the same time, rising interest rates,” he said.
“I’m not uncomfortable at all with where the banks are situated at the moment, because it would take a double shock of rising interest rates and rising unemployment to create the sort of problems that one would worry about.”