Interest Rates to go up soon – the boring data
Carney raises outlook for economy, issues dollar warning
At a news conference in Ottawa after releasing his forecast, Mr. Carney seemed to employ a tactic known as “jawboning,” used when officials try to cool speculators’ enthusiasm for the dollar (CAD/USD-I1.01-0.0005-0.05%), saying that trading the currency as if it will always rise in tandem with global oil prices (CL-FT102.74-1.46-1.40%) is a “recipe for losing money.”
While it is not clear Mr. Carney was indeed trying to bid the currency down, his forecast assumes the loonie will trade above parity with the U.S. dollar until 2014, and reiterates that the strength of the currency is hurting exporters’ competitiveness. Moreover, the forecast included an analysis showing that lately, high oil prices have not been as much of a bonus for the economy as in the past.
“It is far too simplistic to talk about the Canadian dollar as a commodity currency, let alone a currency that moves consistent with one commodity,” Mr. Carney told reporters. “And to trade or to invest in the currency along those lines, ultimately over the medium term, it’s going to be a recipe for losing money. So, this is a much more diverse, complex economy than that, and this is one manifestation of it. We’re not going to give advice on how people should trade in the markets, but it’s important to point out the underlying dynamics.”
On one level, Mr. Carney was just stating reality, as he points out that there is more to Canada’s economy than oil. Another big factor in the loonie’s strength is the fact that investors are drawn to the country’s stocks and bonds, too. But Mr. Carney also has a stake in trying to unhinge the loonie from high oil prices, since putting a brake on the currency will make it easier for him to raise borrowing costs as the economy strengthens, without making life harder for exporters.
The comments came a day after Mr. Carney hinted for the first time since last summer that he is beginning to look for an opportunity to raise his benchmark interest rates from the current 1 per cent, where it has been since September, 2010. (On Tuesday, the loonie shot up almost a full cent against the greenback in response to the mere talk of rate hikes.) The central bankers expanded on Tuesday’s interest-rate decision, in which they indicated that, on balance, the slack in the economy is vanishing more quickly than thought, and as a result, rate hikes “may become appropriate,” depending how events play out. Perhaps to limit expectations for an aggressive tightening campaign, Wednesday’s forecast suggested challenges like the currency, record levels of household debt, a still relatively weak labour market and lofty oil prices will complicate the path to higher rates.
The outlook for Canada is undeniably improved from the bank’s January forecast, as the U.S. recovery gains strength and the euro crisis looks more stable, boosting confidence among Canadian consumers and companies. The economy will grow at an annual rate of 2.5 per cent in each of the first two quarters, 2.4 per cent in the third and 2.5 per cent in the fourth. That compares with the central bank’s January calls of 1.8-per-cent growth through the first half of the year, 2.1 per cent in the third quarter and 2.6 per cent in the final three months of the year.
At the same time, the bank’s 2013 forecasts for the economy were pushed down.
“With confidence having rebounded more quickly than envisaged in January, the bank expects that global uncertainty will have less of a dampening effect on the spending of Canadian households and businesses,” Mr. Carney and his governing council said in their Monetary Policy Report. “The profile for growth in consumption and investment is more front-loaded than previously expected.”
The central bank also raised its forecast for the U.S., Canada’s chief export market, for 2012 and 2013, to 2.3 per cent and 2.5 per cent, and said the euro zone will grow 0.8 per cent in 2013 as it recovers from a smaller-than-previously expected downturn this year.
Still, though Tuesday’s rate statement reminded investors and overstretched consumers that the central bank will not be gun-shy about raising rates before the middle of next year if it deems that necessary to meet its 2 per cent annual inflation target, the forecast contained hints that it will tread very cautiously.
For instance, the bank continues to see high household debt as the No. 1 domestic risk, so even as Mr. Carney has indicated that he would be willing to use monetary policy as a last resort to tame consumer behaviour, he knows that higher rates could tame consumer borrowing too abruptly. In the forecast, policy makers included an analysis warning that Canadians are borrowing too much through home-equity lines of credit, making them “more exposed” to a drop in house prices which, in turn, could “dampen consumption.” And consumption is forecast to make up more than half of the private-led demand that will drive growth over the next couple of years.
The bank’s analysis of oil prices said that, starting in January, they have evolved in a way that “has been unfavourable to Canada,” mainly because the price of oil the country imports (tied to Brent North Sea crude) has risen while the price of what the country’s energy companies sell abroad (tied to West Texas Intermediate) has dropped. This, the bank said, is in part due to the glut of product in the U.S. that new pipeline projects are supposed to alleviate.
“The increase in the price of our oil imports raises production costs for Canadian firms and also puts upward pressure on gasoline prices,” the bank said. “The price differential between WTI and Brent is expected to persist for some time, however, until new pipeline capacity is put in place in the United States and Canada to reduce the excess supply situation at Cushing, Okla.”