“It's not quite a momentous 150-year marker, but it may feel that way since the Bank of Canada last raised interest rates. We are on the cusp of the first rate hike in roughly 82 months. Governor Poloz has spoken on three separate occasions in recent days regarding Canada's strengthening and broadening economic fundamentals. Proof is embodied by Canada outpacing G7 countries by a long shot over the past three quarters. And, another stellar performance is in cue, with real GDP growth tracking roughly three per cent in Q2.
From a central bank mindset, capacity pressures are building more quickly than anticipated, and monetary policy needs to act ahead of those dynamics due to the lagged relationship between interest rates and inflation. The breadth of the expansion gives some confidence on its durability and ability to withstand higher interest rates.
However, the stars are not fully aligned. Both, actual inflation and expectations are moving in the wrong direction relative to the Bank's two per cent mandate. To many economists, this is Utopia… high economic growth, little inflationary concerns.
The bank can certainly afford to wait until October to confirm that a floor has formed under inflation. But, the abrupt change in bank rhetoric in recent weeks has not conveyed a patient tone to markets. This may be a true indication of a growing discomfort on the balance of risks, particularly for household debt levels.
For the Bank of Canada, it likely comes down to whether ‘an emergency level’ policy rate of 50 basis points remains appropriate, given it was initially set to counter the impact of falling energy and incomes. The answer will likely be ‘no’ come July 12.”
Beata Caranci's comments were provided to BNN to preview this week's Bank of Canada interest rate decision. Check BNN.ca over the next two days for more commentary from Canada's top economists.