Op-Eds

As expected, the Bank of Canada held its overnight rate target constant at 1.75 per cent this week. More unexpectedly, with the release of its latest Monetary Policy Report, the central bank lowered its estimate of the neutral nominal rate – the rate compatible with full-capacity output and inflation equal to the 2-per-cent target – to 2.25 per cent to 3.25 per cent, from 2.5 per cent to 3.5 per cent. This means that the constant overnight target rate is closer to the neutral rate than previously thought, providing less stimulus to the economy. As the lower end of the range gets closer to 2 per cent, meaning the real neutral rate would be zero, it is fair to ask how much lower the neutral rate can go. From a data perspective,...
There are signs of strain in the Bank of Canada’s monetary-policy framework that has served Canadians so well over the past quarter-century, delivering low and stable inflation. Apparently aware of the challenges ahead, the bank’s senior deputy governor, Carolyn Wilkins, went so far as to say in a recent speech that the bank will review all its policy options leading up to the next renewal (in 2021) of the inflation-control agreement between the federal government and the Bank of Canada. While some cracks are appearing, we would argue tweaks are all that is required. The Bank of Canada has targeted inflation since 1991 and kept the target at two per cent since 1996. The inflation-targeting framework has delivered stable inflation...
It’s been a decade since the collapse of Lehman Brothers sparked the 2008-09 global financial crisis and recession. The global economy is finally performing at a robust level, with solid output and employment growth in many regions and interest rates generally on the rise toward more normal levels. The acute pain felt during the financial crisis, and the protracted period of recovery, should have encouraged policy-makers and their voters to take meaningful steps to avoid a repeat performance. But have lessons been learned? One positive outcome was the innovative application of monetary policy. Central banks were the reliable backbone of the policy response to the financial crisis; exceptional and prolonged monetary stimulus and...
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 were...
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...