Monetary policy might seem a dull subject heading into a gloriously free Canada Day long weekend but given yesterday’s extraordinary statement by Bank of Canada Governor Stephen Poloz, it is worth taking a few minutes to peer into a near future hinted at by the Governor and his deputies over the past few weeks.
“It does look as though those cuts have done their job,” Mr. Poloz said reflecting on the dramatic interest rate cuts made after the oil crash in 2014. Those cuts were piled on top of previous cuts made after the global economic meltdown of 2008. As of this moment, Canada’s central bank’s benchmark loan rate is a staggeringly low 0.5% leaving very little room for Mr. Poloz to go lower without flirting with the negative rate interest policy he mused about just over a year ago.
Are you done yawning yet? Ok, let’s move forward.
Both Mr. Poloz and Senior Deputy Governor Carolyn Williams have made hawkish statements about Canada’s benchmark rate which has not been raised in over seven years. These statements, coupled with stronger than expected first quarter national GDP reports and economic growth in all major regions of the country lend weight to speculation Mr. Poloz will announce an increase at a July 12 Bank of Canada policy meeting with the heads of the six major banks.
The days of cheap money are not necessarily over however borrowing money, using credit cards, or exploiting a line of credit are likely to become a little more expensive. Any changes in interest rates will have profound effects on the business of doing business in Canada. Some of these effects will be very positive while others will cause belts to tighten.
On the positive side, a small rise in the Central Bank rate will boost both business and consumer confidence heading into the summer holiday season. This is critically important across all regions of Canada as Canadian holiday spending is predicted to focus heavily on vacations inside of Canada rather than in the United States or overseas. If Canadians feel they can safely spend a little more money enjoying themselves at home, all regions of the country will benefit. Businesses will benefit from increased confidence in investment in Canadian stocks, bonds, bills, and innovation. The Loonie hasn’t been a particularly well paying currency for investors over the last seven years. Even a slight rate increase of 0.25% gives institutional investors a second reason to look at investment in Canada.
Most importantly, a slight rise in the Central Rate will be a beacon signal to the world that Canada has overcome the dreaded “Dutch Disease” that plagued our economy after the crash in oil prices. The Dutch Disease is a term used to describe the negative effect of something that spurs a sudden influx of foreign money into an economy that fundamentally changes that economy. The discovery of large amounts of oil is an example. In the first decade of the 21st century, the previous Stephen Harper government attempted to make Canada into a petrol-economy through exploitation of Alberta’s staggeringly massive oil sand reserves. The continuing downturn in oil prices has had the most negative impact on Canada’s overall economy and threatened to place the province of Alberta into a recession however Mr. Poloz and Ms. Williams appear to be confident Canada has sailed through the roughest of these waters and is ready for a more rational monetary policy.
While the machinations of economics are as complex as they are mundane, it is widely believed a slight rise in interest rates will benefit the economy and help to stabilize Canada’s other great economic threat, the fear of a massive correction in the housing market. Moving into a glorious and free Canada Day long weekend, hints of a rate hike might be the best news Canadian businesses could possibly hear.
On behalf of Telsec Business Centres, please enjoy the long weekend safely and responsibly but most of all, have fun. You’ve earned it. We are a truly blessed and remarkable nation. Happy Canada 150.