Just about everyone is convinced that the Bank of Canada is going to raise its overnight rate target next week. Maybe that certainty is overdone.
It wasn’t that long ago that few economists expected much to happen in the way of rate hikes until March. But then, just before Christmas, the hawkish data reports started coming in fast and furious. First, Statistics Canada reported that inflation suddenly surged to 2.1 per cent in November, up from 1.4 per cent in October. That put consensus expectations of a January hike above 50/50.
Then, last week, there was that boffo employment report, with jobs numbers that wildly beat expectations. According to Statscan, employment increased by 79,000 jobs in December, pushing the jobless rate down to a 40-year low of 5.7 per cent.
And in case that didn’t tee it up high enough for the Bank to grip it and rip it, its winter Business Outlook Survey, released this week, suggested that about half of companies plan to increase investment and hiring this year, even as many expect tighter labour markets. And more than half say they would have at least some difficulty meeting an unexpected surge in demand, which is the highest level of unreadiness in years.
Put it all together, and a rate hike next week looks like a slam dunk, at least to analysts. But what about Stephen Poloz? If nothing else, the decision will be a litmus test for a sort of unspoken assumption about monetary policy for some time — that the Bank of Canada governor and his team would really, really like to raise rates, but just haven’t had a good enough excuse to do it yet. Now they have one.
But what if the assumption is misguided? Remember, back in the summer, after consecutive rate hikes in July and September? The loonie soared as markets and some commentators were quick to assume that the Bank had embarked on a clear tightening trend. Poloz was quick to correct them, however: in a speech at the end of September, he declared that there is “no predetermined path for interest rates.” The loonie plummeted, and analysts had to do a rethink.
There are also a few data points that might pause Poloz’s hand. One is the level of household debt, which has continued to soar. Canadians’ debt-to-disposable income ratio in the third quarter of 2017 hit 171.1 per cent — an all-time high. Now, that might be a very good reason to raise rates again, but it might also be a good reason not to. With the effects of the summer hikes on consumer borrowing still uncertain, it might be too soon to play with such a significant element of the economic engine. As well, new rules around mortgage lending might already be having some damping effect on housing markets; another rate hike, now, might be one step too close to tipping the balance and throwing hard-pressed homeowners into crisis.
Meanwhile, Canadian exports, which have long been among the Bank’s concerns, are hardly on a tear, and the uncertainty over NAFTA renegotiations — scheduled to resume, after not much apparent progress so far, on Jan. 23 in Montreal — continues to loom large. Would Poloz be wise to raise rates and give himself some dry powder in case the worst happens? Or would we be better off letting the economy run hot into a potential crisis? And what would it cost him to wait, anyway?
After all, inflation, even at 2.1 per cent (a number boosted by high gasoline prices), is hardly in the red zone. (The Bank’s official target range is one to three per cent.) On top of that, the country is in the throes of what looks like a hard winter, which looks like it could suppress the economy in the first quarter. The Bank might well write that down to a one-off, but still…
And finally, about those December jobs numbers: when the reported data is such a surprise — analyst expectations were for an increase of a mere 1,000 jobs — it might be instructive to look at the raw numbers. The reported gain of 79,000 jobs is a seasonally adjusted number; the actual data from Statscan’s labour force survey suggested a decline of 6,700 jobs (net of a decline of nearly 40,000 private sector positions). The magic of seasonally adjusted numbers no doubt makes for high-impact headlines, and it’s necessary for statistical comparisons, but the Bank may take a closer look.
Now, even given all that, the best-educated guess is that Poloz will kick off the new year with a rate increase. Then again, if Poloz has proven anything over his tenure at the Bank of Canada, it’s that he’s not afraid of disappointing analysts and commentators. So we shouldn’t be surprised if we’re surprised this time around.