Face of Nation : On the face of it, Bank of Canada governor Stephen Poloz and his deputy Carolyn Wilkins had some excellent news about the Canadian economy in yesterday’s Monetary Policy Report.
The happy story included falling mortgage rates, continued employment strength and growing business investment that have pushed Canadian economic growth rates higher in the first half of the year than almost anyone expected.
But as global trade threats linger, Canada’s top central bankers warn that many people who should know better, including stock market investors, seem to think cuts to interest rates can solve all problems.
In a complex world riven by trade disputes, they say, there are simply limits to the power of central bankers to patch things up. The warnings, including hints of the possibility of a new bout of stagflation, were effectively a message that rate cuts are no easy answer for the damaging effect of a global trade war.
“The underlying shock would be very bad for economic growth, it would be bad for the level of productivity, it would be quite harmful to profitability,” said Poloz of a potential growing trade spat. “It would be a pretty significantly negative scenario.”
More on that later, but first a look at why the Canadian central bank foresaw Canada’s interest rates remaining steady while on the same day U.S. central banker Jerome Powell implied in congressional testimony that U.S. interest rates were about to fall.
While that sounds like the U.S. and Canada diverging, the senior deputy governor of Canada’s central bank said at yesterday’s news conference, instead it was a sign that the two economies were growing together.
“In fact, it’s a sign of convergence, and this is because the two countries are at different points in our economic cycles,” said Wilkins. “The U.S. is slowing to a more sustainable pace while Canada is moving back up to its trend growth.”
At the end of last year there were signs businesses were shying away from new Canadian investments due to fears a new NAFTA would not be resolved. Even as that fear faded, the U.S. steel and aluminum tariffs and U.S. President Donald Trump’s threats against Mexico over immigration left a lingering feeling of caution.
