The End of Judgement Days?

Here we go again with the set up for more confusion between the market and the Bank of Canada.  It should be simple.  With core measures of inflation firming at 1.7%, an incredibly strong monthly jobs report diminishing already little remaining excess capacity in the labour market and an economy already at full capacity, it should be a lay-up to expect an inflation targeting central bank that says they are data dependent to nudge rates higher at their next meeting. I know they said they would be cautious when raising rates but surely this is enough, even for this Governor.  

The market has learned over the last few months that Bank action is not strictly data dependent but instead heavily judgement dependent.  The heavy reliance on judgement, we are told, is to allow Governing Council to fill in the blanks caused by the many “uncertainties” that their models just can’t capture.  And so here we are with increasing risks to inflation from a labour market blasting away and about to feel the effects of higher minimum wage legislations, with oil above $60 and with the US economy about to get a fiscal boost, but at the same time with Governing Council having to deal with the same “uncertainties” and structural issues they consistently point to that may dramatically temper any future inflationary impulses.  Nafta could still get pulled, accumulated household debt could adversely impact consumption, OSFI’s new mortgage rules could still flatten the housing market, and, probably coming soon, the legalization of pot could potentially lower productivity (but no one will care).  But besides all these “what ifs”,  this Governor could keep the Bank on the sidelines for the simple reason that youth unemployment did not fall last month….Karim is still in his parents’ basement! 

At some point, however, you would think that the Bank’s own credibility as a forward looking, data dependent inflation targeting central bank will become more at risk.  How far can they push their reliance on their “go-to” list of uncertainties that allow them to justify a level of monetary accommodation that looks more and more targeted to only a few select slices of the economy.  I believe the Governor, in his noble zeal to be the hero of main street is risking giving many people the impression that he is either targeting the currency or unemployment rather than what he is mandated to do.

The Bank, for its own credibility, needs to move rates higher in January.  Responding in a timely and consistent manner to the data will reassure the market that the Bank remains committed to its inflation targeting mandate.  This acknowledgement that risks to inflation have increased and are being addressed will ultimately give the Bank the needed trust from the market to implement appropriate policy that will achieve their 2% inflation target and ultimately get Karim into a management position.