But recent developments in the global economy — and to a lesser extent in Canada — have not to been positive, nor supportive of monetary tightening, regardless of what central bankers want.
The slowing global recovery and the re-emergence of the European debt crisis has caused the TD Bank to revise its outlook on when Bank of Canada governor Mark Carney can safely resume pushing the policy rate, now at one per cent, back to the three to 3.5 per cent range analysts believe is ideal for a balanced economy.
In a note released Friday, TD says Carney is unlikely to start hiking rates until at least next July, when U.S. Federal Reserve chair Ben Bernanke is scheduled to stop pumping billions of dollars into the economy under his controversial quantitative easing initiative.
That is good news for Canadians, both consumers and corporations, looking to borrow cheaply.
But, overall, super-low interest rates are reminders the economy is on life-support and that central bankers are more concerned about sending the economy crashing in the near term than worrying about setting up conditions for a reckoning later on.
Carl Weinberg of U.S.-based High Frequency Economics notes that Bernanke’s much criticized $600 billion US injection and zero interest policy has done nothing to stoke inflation, which this week came in at 0.6 per cent in the United States.
Nor are price pressures building despite stimulative policies in Canada, where core inflation remains a tame 1.5 per cent, or in other advanced economies such as Japan and Germany.
“With employment slack everywhere, and with abundant excess capacity everywhere, the G7 economies are all experiencing historic or near-historic lows in core price increases,” Weinberg notes. “This tells us that the G7 economies all remain depressed, and there is plenty of scope for monetary stimulus.”
The Organization for Economic Co-operation and Development also this week urged Carney to hold tight until at least the spring.
Being the first in the G7 to tighten, it’s unlikely Carney will go so far as reverse course on rates, failing signs of a second downturn.
But TD chief economist Craig Alexander thinks Carney’s fear that Canadians may be induced to take on debt beyond their means is not as great as the fear that raising rates could slow consumption, raise the dollar and crash the economy.
“I think the Bank of Canada would like to have higher rates from a domestic point of view,” he said. “But there is so much slack out there. It does not suggest double-dip recession, but people have to come to terms with the fact that growth of 1.5 to two per cent is now normal and the labour market is not going to recover quickly.”
The often missed fact about two per cent growth, adds Alexander, is not that it is modest, but that it barely keeps up with the trend rate of the economy. That means it will likely take another two years just to return to full capacity.
Evidence of just how profoundly Canada’s economy has slowed since the quick reboot that began a year ago is mounting.
This week, Canadians learned factory shipments shrank 1.4 per cent in volume terms in September — an important indicator because with consumer spending receding, the economy needs a boost from exports to make up the difference.
The most visible sign of braking is in Canada’s much-ballyhooed employment record. While still better than the U.S., job growth has virtually ground to a halt since June, gaining about 5,000 a month when about 15,000 is needed just to keep up with Canada’s population growth.
As little as the Bank of Canada is counting on exports to bolster growth, it may be overbanking on its expectations, says Sal Guatieri of BMO Capital Markets. Europe’s woes, along with those in the U.S., and China’s tighter monetary policy, all point to global markets drying up further.
Not everything argues against a rate hike, says Guatieri, but most things do.
Julian Beltrame – The Canadian Press
