Too Early to Tell

There really is not a lot to say following the Bank of Canada’s rate decision this week.  They did nothing and had plenty of reasons to remain inactive.  If anything, even with the economy at full employment, the odds of them being on the sidelines for a considerably longer period of time has risen.  It is going to take some time before they have a better read on the factors that influence inflation.  Their new favourite phrase in their inaugural economic progress report, given the day after their decision, was “too early to tell”.   Its too early to tell what is going on with housing following the measures taken by OSFI.  It is too early to tell the impact of slightly higher rates on credit growth.  It is too early to tell if inflation dynamics have changed.  It is too early to tell the extent of capacity being created as the economy operates close to full potential.  And, of course, we have to wait to see how badly investment is being impacted by the uncertainties surrounding trade and they can’t even quantify any adverse scenario with NAFTA until there are concrete outcomes.  

So it would seem it is too early to tell if another rate increase is imminently needed.  The economic momentum that was pushing rate increases has died for now.  Even after the Bank gets greater clarity and when this ship manages to get out of the doldrums, the extent of further hikes will be muted.  Rates will likely need to remain well below neutral (estimated by the Bank to lie somewhere between 2.5-3.5%) to offset the persistent competitive challenges for our exports, the impact of US tax reform and trade policies on domestic investment and given the unknown sensitivity of our leveraged economy to higher rates.  None of these factors are likely to change anytime soon.  Household credit is slowing but it is still moving higher.  Trump and his chumps Wilbur, Bob (can I call you Bob?) and Peter will continue to hang Nafta over our heads for as long as they are eating soup out of a can and our politicians at all levels seem to be in no hurry to address the vast array of things that are making our economy uncompetitive and in fact seem to want to add a few more.  

In the meantime, we will continue to accept weak political leadership and have the saver be burdened with the tax of lower rates and all other citizens who consume or use any imports pay the price of a lower currency.  Monetary policy should not have to do all the heavy lifting but it is the political expedient thing to do.