from Sunday's G&M ... some really scary numbers that need to be re-emphasized
http://www.theglobeandmail.com/repo...dary-to-pause-or-not-to-pause/article1760941/
Mark Carney's rate-hike quandary: To pause or not to pause
Jeremy Torobin
Ottawa— From Monday's Globe and Mail
Published Sunday, Oct. 17, 2010 6:57PM EDT
Last updated Sunday, Oct. 17, 2010 9:13PM EDT
Mark Carney must feel like a parent trying to instill wise spending habits in a carefree kid heading off to university: all he can do is give his best advice and hope it sinks in.
That’s a rough approximation of the tricky position the Bank of Canada governor finds himself in as he prepares to release his latest interest-rate decision on Tuesday.
The central banker is widely expected to suspend his tightening campaign after three straight increases, holding the benchmark overnight rate at a still-very low 1 per cent. On Wednesday, he’ll follow that up by producing a revised outlook for the Canadian economy, spelling out his analysis of why he (in all likelihood) believes there are too many unknowns right now to make a move.
The new figures, some of which will be in his Tuesday statement on rates, will include Mr. Carney’s latest thinking on when the recession-era slack in the economy will finally be gone. If the governor says that excess capacity is going to linger into 2012, that would confirm what financial markets are already predicting: that the cost of borrowing could stay put for several months.
But a prolonged period without rate hikes also creates a problem: it could lure households that shouldn’t borrow more into going deeper into debt.
Mr. Carney last month sharpened his warnings against using supercheap credit to pile up debt that won’t be affordable as rates return to more normal levels, using a speech and press conference in Windsor, Ont., to highlight that debt in Canada is at a record 146 per cent of disposable income and households, on average, have spent more than they’re worth for the past nine years.
He also lamented that an already slower economy could stay weak as some borrowers pull back. That would make it that much harder to raise rates, even as policy makers fret that as long as rates are low, the most overstretched Canadians may not get that they should scale back too.
"He’s making a valiant effort at conveying a very complex message,’’ said Chris Ragan, a McGill University professor who is leading the C.D. Howe Institute's research on monetary policy. ``He’s right to be giving both sides of the story: There are people out there for whom interest-rate increases will be a problem because they’ve got too much debt; at the same time there are others who are being excessively prudent, shall we say, and what they’d like is for them to go out and borrow more to keep the economy going.’’
Mr. Ragan, in fact, was in the hike camp late last week when C.D. Howe’s Monetary Policy Council voted 5-4 in favour of recommending a fourth straight increase, arguing there is still too much stimulus in the economy, regardless of the sharp slowdown of the past few months and the sputtering recovery in Canada’s main export market.
But most analysts say a pause, and possibly a long one, is in the cards.
After all, the economy shrank in July for the first time in almost a year and had a net job loss in September, and the most recent inflation readings came in well back of the central bank’s 2-per-cent target.
Perhaps the biggest driver of a pause is the mounting evidence that the U.S. Federal Reserve will act to boost the flagging U.S. economy, taking steps that would keep the American dollar down and send investors who want higher yields to currencies like the loonie.
A stronger Canadian currency brings advantages, like helping companies buy state-of-the-art foreign machinery that will boost their productivity. Still, should the loonie gain too much against the greenback too quickly, it could pour more cold water on the economy, especially the manufacturing sector. Already, Mr. Carney has said his new growth outlook for the second half of 2010 will be lower than his July forecast.
Overseas investors are attracted to the loonie in part because Canadian rates are higher than in the U.S., where the Fed’s main rate is still close to zero. As Mr. Carney said last month, there are limits to how much the two rates can diverge. So until the Fed’s ``quantitative easing’’ plans and their effects become clearer, the prospect of them constitutes another big question mark in what Mr. Carney has repeatedly called an unusually uncertain environment.
``When you don’t know, you don’t take chances,’’ said Benjamin Tal, deputy chief economist at CIBC World Markets. ``Given the uncertainty, they could give us a very good hint that they’re not going to move for a while.’’
However, should the central bank give such a signal, `Mark Carney: Financial Adviser’ will likely make another appearance this week too, reinforcing that as soon as conditions warrant, he will start hiking interest rates again.
