The Bank of Canada is holding steady on its benchmark interest rate at one per cent after two rate hikes earlier this year, saying that it will be “cautious in making future adjustments to the policy rate.” That make perfect sense, says former Bank of Canada governor David Dodge who thinks that there are enough known unknowns about the Canadian economy going forward to exercise caution with interest rates.
Yesterday, the BOC released its Monetary Policy Report which arrives four times a year and gives an indication on the Bank’s rationale for its decisions vis a vis the Canadian economy, this time projecting a welcome expansion by 3.1 per cent for 2017, followed by growth of two per cent the following year. Although not unexpected, the BOC’s lack of movement on the rate has been interpreted as a lack of confidence in Canadian currency, reflected in trading which has seen the dollar drop almost a full cent, now sitting at a two-month low.
“The Bank of Canada shifted to a significantly more cautious tone on interest rates Wednesday, prompting a sharp descent by the Canadian dollar,” said Don Curren, strategist at Cambridge Global Payments, to CBC News, “and perhaps presaging more weakness in the currency as expectations about … monetary policy evolve.”
But Dodge says that the BOC’s projections on Canada’s economy as well as its reaction to the unexpected windfall of a 3.1 per cent uptick are “pretty reasonable.” Speaking yesterday with BNN’s Michael Hainsworth, Dodge said that the uncertainties about the economy merit caution.
“We don’t really know how quickly we’ll see prices and wages move up,” says Dodge. “We’re not sure why they haven’t gone up a little more quickly and because of that the Bank of Canada says they need to be a little more cautious about raising interest rates. They’re cautious because of the difficulty of knowing what these data are really telling us.”
On the role that automation is playing in reshaping the labour landscape in Canada, Dodge says that again, we’re in a wait-and-see mode in terms of impacts. “There are structural changes going on but how they’re impacting the economy, we’re not really sure,” says Dodge. “These things take time and we’ve come off a long period of excess labour supply. We’re now in a market that’s more balanced and it’ll take a while for things to catch up.”
The extra jump in the economy —Canada’s economy is said to be expanding faster than any other Group of Seven country— has buoyed the federal government into cutting its deficit projection for the fiscal year ending in March to $19.9 billion, down from $28.5 billion, along with the introduction of $7.7 billion in new spending over the next six years.
Dodge says the uncertainty of Canada’s trade position means that efforts towards reining in the deficit are likely the right approach, even in times of relative prosperity. “The trade uncertainty in and of itself has an impact: it tends to dampen investment,” says Dodge, “and that may legitimately be one reason why the BOC may be a little more cautious about pushing up interest rates as quickly as their base-case numbers tell them that they really should.”