The Bank of Canada is trying something new.
Tired of Bay Street’s grumbling that Governor Stephen Poloz’s approach to communications was difficult to understand, the central bank late last year decided to explain itself more often.
From now on, one of the institution’s leaders will speak within a day or two of every policy announcement, which wasn’t always the case in years past. The innovation should reduce the risk of financial-market volatility, as questions about the central bank’s thinking will be answered relatively quickly.
The first of the Bank of Canada’s new “economic progress reports” was delivered March 8 in Vancouver by Timothy Lane, the longest serving deputy on the Governing Council. Lane’s remarks reinforce the bottom line of Wednesday’s policy announcement, which was that the central bank would be keen to resume raising interest rates if not for the complete lack of visibility around what U.S. President Donald Trump means for the future of global trade.
If there was a surprise in Lane’s speech, it was his rosy interpretation of the state of business investment.
That’s been a serious weakness for sometime. But recent figures suggest years of ultra-low borrowing costs and stronger global demand are coaxing executives to spend. Statistics Canada’s recent report on fourth-quarter gross domestic product show business investment grew at annual rate of 6.9 percent over the final three months of the year, a number that Lane called “strong” and “encouraging.” That’s the most enthusiastic the central bank has sounded about investment in years.
Still, policy makers are worried about the future.
Canadian companies might be gearing up to increase output, the Bank of Canada is pretty sure that international companies have grown wary of spending money in Canada. Trump’s desire to either overhaul of quit the North American Free Trade Agreement, along with his capricious use of retaliatory tariffs, appears to be hurting Canada’s ability to win new foreign investment.
“Recent developments with respect to steel and aluminum, alongside increased protectionist rhetoric, carry potentially serious consequences,” Lane said. “Even with no changes in our trading arrangements, the uncertainty around them is affecting business investment decisions.”
The U.S. corporate tax cuts at the end of last year also hurt Canada’s competitive position, Lane said. The federal government opted against a fiscal response to Trump’s policies in last month’s budget. That means there is extra pressure on the central bank to do what it can to offer some stimulus. The result: the Bank of Canada’s decision to leave its benchmark rate unchanged at 1.25 percent this week.
To be sure, the central bank isn’t panicked about inflation, and therefore wouldn’t feel compelled to raise interest rates quickly even if normalcy still prevailed in Washington.
Increased investment boosts Canada’s capacity to produce goods and services. All things equal, that reduces inflationary pressure because the companies are better able to keep up with demand. And Poloz is inclined to let the economy run a little hot because he thinks he has a unique opportunity to increase capacity and make the economy stronger for years to come.
Lane said “elevated” levels of long-term unemployment and youth unemployment suggest there still is some slack in the labour market, suggesting policy makers think they can get away with leaving interest rates relatively low for longer yet.
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