After raising the bank rate three times this year alone, Governor Poloz continues to signal that the Bank is nowhere near completing its current cycle of rate increases. Recent statements by the Governor indicate that Canadians should expect the bank rate to hit 3 percent from its current level of 1.75 percent[1].
According to legend, John Maynard Keynes was once challenged as to why he changed his investment strategy so abruptly. His answer was reputed to be “When the facts change, I change my mind. What do you do, sir?”
Perhaps, the Bank of Canada should do the same. Indeed, there are many facts and conditions that are changing such that future rate hikes should not be taken for granted. For example:
North American and Global Trade Issues. The uncertainties regarding the outcome of the NAFTA negotiations have been largely removed, yet Canada-US trade relations remain contentious. Congress has not yet ratified the new trilateral trade agreement .U.S. tariffs on steel and aluminum continue to affect bilateral trade flows in significant industrial sectors. Globally, trade is slowing in just about every region. As the U.S-China trade war continues, we can expect further repercussions on an international scale.
Oil Prices Decline.Amidst the weakness in virtually all the commodities that Canada exports, the collapse in Canadian oil prices poses a particularly serious threat to western Canada. Canadian producers now receive less than $20 bbl when exporting to the United States, a price that has resulted in Canadian producers scaling back on production and future investments.[2]
Unemployment and Capacity Utilization. Although the Bank does not have a specific charge to maintain full employment, it does, nonetheless, frame its policy debates around the concept of full employment and potential output. With Canadian unemployment standing at 6%, the Bank cannot argue that we are operating at potential. Despite labor shortages in specific industries, the economy continues to experience spare capacity.
