The Bank of Canada took centre stage last week, both with an announcement on interest rates on Tuesday (they didn’t budge), and also a broader statement about the current economy in what is called the Monetary Policy Report. And when the central bank speaks, people tend to listen.
So what’s on the minds of the gurus wandering the hallowed hallways of the Bank of Canada these days?
In a nutshell, they’re suggesting that the economy is finally picking up some speed. For the year as a whole, the Bank of Canada estimates that the Canadian economy contracted by 2.5 per cent in 2009. The good news is that it’s projected to grow by 2.9 per cent in 2010, and 3.5per cent in 2011.
But surely, this isn’t the first time that the Bank of Canada has pronounced the recession dead. Haven’t we heard a bit of this tone before, back in the summer of 2009 when the central bank was forecasting pretty robust growth for the third quarter of the year? That growth didn’t materialize. So why should we believe the Bank this time around?
The bank is basing its somewhat rosy forecast on the notion that the U.S. and global economies are finding their feet. While that idea is something that reasonable folks could debate, it is certainly true that financial systems around the world are in much better shape.
At the very least, it has become more apparent than at any point during 2009 that the worst of the global melt-down is behind us.
But the Bank of Canada is also expecting another event to happen, probably some time next year.
In its summary statement Thursday, the Bank stated that: “The private sector should become the sole driver of domestic demand growth in 2011.”
The implication is that government stimulus programs – both here in Canada and around the world – must draw to a close and hand the baton to the private sector. At the moment, almost all of the heavy economic lifting is being done by government. The bank is suggesting that by 2011, the private sector will have to kick in.
Another issue brought up by the bank this week was (surprise, surprise!) the high value of the Canadian dollar. Warnings about the high flying loonie have become de rigour in bank statements lately, and Thursday’s statement was no exception: “. . . there is the risk that persistent strength of the Canadian dollar could act as a significant further drag on growth and put additional downward pressure on inflation.”
What the bank is really signalling to markets is yes, we continue to worry about the high dollar, but there is precious little that we can do about it, so we had all better get used to it.
Finally, the bank reiterated this week its conditional commitment to keep its trend-setting overnight interest rate at the current rock-bottom 0.25 per cent until at least June of this year.
To its credit, the bank has been stalwart in this commitment and has reiterated it for the past six months or so, and that has given the markets some certainty as to what the Bank is thinking and what might come next. Transparency is golden for markets!
And with weaker-than-expected inflation numbers out this week, we know that the bank will be in no big hurry to raise rates before June, and that rate hikes may even come well after June.
But when rate hikes finally do come – and they will – the Bank of Canada will have to stand pat against the inevitable howls of complaint that rate hikes are stomping on the fragile economic recovery.
Some of those complaints will probably come from politicians, and in the worst case scenario, there would be some political pressure on the Bank to keep rates low for longer.
Today’s rates not normal
What these complainers need to understand is that the current overnight rate of 0.25 per cent is not normal. It is a rate set in response to a financial crisis, and it cannot stay that low for much longer.
Fortunately, the worst of the recession is over.
Todd Hirsch is Alberta business columnist for Troy Media Corporation.