Op-Eds
Markets were not surprised by today’s Bank of Canada announcement to hike its overnight target rate by 25 basis points to 1.5 per cent. They had factored in a very high probability of an increase. And, consistent with a stated desire to improve its communications with both market participants and “the soccer dad,” it was a speech and a press conference that set the stage.
Governor Stephen Poloz’s speech on June 27 was an important factor in moving market expectations. By the end of the news conference that followed his speech, markets were confident of a hike. The theme of the speech was transparency and communications. By significantly shifting market expectations in the direction of a rate hike, the speech and news conference…
Bank of Canada Governor Stephen Poloz punted the “Will He or Won’t He” rate watch to July when the Bank of Canada left its target overnight rate unchanged on Wednesday. Markets had factored in only a 17 per cent chance of a hike, so there was little surprise. Looking ahead, there is a lot to get excited about for the Canadian economy, but in the near term, a few worrying signs justify leaving rates alone. Most of these signs have appeared repeatedly in Bank of Canada communications – but for one: falling money growth. And it deserves more attention.
First, the rosy side of the ledger. Headline inflation is now above the 2-per-cent target, and the bank’s measures of core inflation are all close to 2 per cent. Canada’s…
For the first time in three years, headline inflation in Canada has moved above the Bank of Canada’s 2-per-cent target. Whether or not it will continue to increase, the fact that the bank’s three core measures of inflation averaged above 2 per cent for the first time in six years certainly suggests that it will. But the question remains, why has it been so hard to hit the 2-per-cent target? In a recent C.D. Howe Institute paper, we show that demographics – often thought of as an issue for health care or pension costs – has acted as a drag on monetary policy effectiveness and, in turn, has led to lower inflation.
Much work has been done examining the issue of tepid inflation since the financial crisis. Canada has not been immune…
The wait for the Bank of Canada to move is over; now the waiting for the next steps begins.
Wednesday's rate increase by the bank did not come as a surprise. In its December interest-rate setting announcement, the bank noted that it would be guided by incoming data before raising its target for the overnight rate. Well, the data have spoken. Headline inflation nudged above the bank's 2-per-cent target in November, coming in at 2.1 per cent, and two of the bank's preferred measures of core inflation, CPI-trim and CPI-median (which remove volatile components from the index), moved up closer to 2 per cent.
The bank also noted the robust pace of business investment, and the positive outlook for future investment as factors…
In its interest-rate announcement on Wednesday, the Bank of Canada once again underlined that future changes in rates would be conditional on the data. Wednesday's news statement noted that the Governing Council will continue to focus on how sensitive the economy is to interest rates, how economic capacity evolves, and changes to wages and inflation.
That is fine as far as it goes, but for households and businesses trying to anticipate changes in the overnight rate, and therefore changes to market rates, knowing that monetary policy is "data-dependent" – as the phrase has it – leaves a lot of unanswered questions.
To clear up the uncertainty, the bank should consider publishing its projected path forward for interest rates…
