Household debt, housing in focus ahead of Bank of Canada decision
Stephen Poloz is heading into the final few months of his term as Bank of Canada governor showing few signs of giving up his status as one of the industrialized world’s most hawkish central bankers.
At a decision Wednesday, the bank is widely expected to hold its key interest rate at 1.75 per cent, keeping it unchanged for a 10th-straight meeting and leaving Canada with the highest rate among advanced economies.
Markets also don’t see much chance that Poloz, who leaves office in June, will lower borrowing costs in any of his final three meetings after this one, with odds of a cut at less than 40 per cent over that time. That’s despite having reason to cut, given the economy looks to have slowed sharply at the end of last year.
Here are some of the reasons why he’s seen remaining on hold:
In public appearances since October, officials have sought to accentuate the positive, highlighting the nation’s strong jobs market and on-target inflation. At the same time, they’ve been reluctant to put much stock in weaker indicators they say are transitory -- as Poloz did as recently as this month.
Deputy Governor Timothy Lane defended of the Bank of Canada’s decision to buck the global easing trend, saying in December the nation’s resilient economy is allowing it to “chart its own course in monetary policy.”
Underlying price pressure as measured by core inflation has been stable near the Bank of Canada’s two-per-cent target for about two years. That reflects an economy running nicely at about its capacity -- neither too hot nor too cold.
Of course, what matters more for policy makers is where inflation is headed rather than where it’s been, and the central bank will update its outlook with new quarterly forecasts on Wednesday. They will probably revise down fourth quarter growth estimates, from their October projection of 1.3 per cent. Growth is trending at less than one per cent for the final three months of last year, according to the latest Bloomberg survey of economists.
But the net effect of the changes isn’t clear. For all of 2019, growth may be higher than the bank previously forecast because of upward historical revisions by Statistics Canada. That means the economy probably had less slack to begin with.
A weak fourth quarter also doesn’t mean the central bank will cut its growth forecasts for 2020, given the stabilizing outlook for the global economy and some positive developments on the trade front.
Officials sometimes downplay the extent to which household debt and financial stability factor into rate setting, but the recent housing rebound and acceleration in borrowing will only amplify their concern. Poloz highlighted the possibility earlier this month that speculative activity is returning in some major real estate markets. That’s one more reason not to cut.
Elevated levels of household debt contributed to the governor’s decision to raise rates as much as he did, beginning in mid-2017. It wasn’t a popular move. The higher rates drove up the Canadian dollar, increased debt service ratios for millions of Canadians and even raised eyebrows in government circles. Which is why, having already endured the pain of hiking, Poloz may be even more wary of reversing that move.
To be sure, Poloz won’t hesitate to cut if there’s a discernible worsening in the outlook. The central bank’s primary inflation targeting objective is aimed at ensuring the economy grows at a sustainable pace over the medium term. Financial stability is a secondary concern.
So if the data continue to disappoint, a rate cut may be in the offing. While the markets are sanguine about a move, nine of 17 economists surveyed by Bloomberg are anticipating at least one rate cut by June.
Nor, if history is any guide, will Poloz’s imminent departure hinder him from acting. David Dodge cut rates in his final decision as governor in January 2008. So did Gordon Thiessen in 2001.
That said, as long as the economy remains in a relatively good place and household debt levels continue to pick up, Poloz may be content to simply stand pat before he stands down.