Will Canada Be Next to Raise Interest Rates?

Rate hikes by the Reserve Bank of Australia have led some analysts to wonder if the Bank of Canada will be soon following suit. David A. Rosenberg, Chief Economist & Strategist at Gluskin Sheff, is not one of them.

As he points out in Tuesday’s Breakfast with Dave: Market Musings & Data Deciphering, Australia has a great deal more exposure to accelerating growth in China. Only 3% of Canadian exports go to China while 24% of Australian exports go there. Furthermore, Canada has much greater exposure to the moribund U.S. consumer: 75% of its exports go to the U.S versus 6% for Australia.

Yet, interestingly, the Aussie dollar lost ground after the central bank’s latest rate hike in a “sell-the-news-buy-the-rumor” kind of move. Bank of Canada Governor Carney no doubt noticed that response and might accordingly be less fearful a rate hike would strengthen the loonie (as happens most of the time due to capital inflows). And no doubt he would love to raise rates to head off the bubble-like conditions fermenting in the housing market – especially if the loonie remains well behaved and doesn’t inflict any more pain on the already hard-hit export sector.

Comments

[somecatchyp...:]

Considering Canada’s dependence on exporting, I seriously doubt that the Bank of Canada will do anything that might cause the loonie to appreciate versus the US dollar.

A few weeks ago, Canada’s big banks raised mortgage rates.

I suspect this was done at Mark Carney’s request. A brilliant move IMO. It put’s a lid on Canada’s housing bubble, while at the same time keeping rates low for the broader economy.

Nov 03 02:16 PM

[derryl:]

"A few weeks ago, Canada’s big banks raised mortgage rates.

I suspect this was done at Mark Carney’s request. A brilliant move IMO. It put’s a lid on Canada’s housing bubble, while at the same time keeping rates low for the broader economy."

A few weeks ago I opined that the B of C was not even trying to slow the loonie's rise because it would be too expensive to buy enough greenbacks and futile in any event. The next day Carney jawboned the loonie down by a full cent, and he has subsequently talked it down even further.

I share your theory that Carney may have persuaded the bankers to raise mortgage rates ahead of what may be a far-future B of C rate increase. The housing heat can be doused without harming exporters. This is monetary fine tuning. Carney is proving to be a master at his trade.

Nov 03 05:15 PM

[bob adamson:]

I agree with the earlier comments of derryl and somecatchyphrase and add the following.

Don’t assume that the Canadian’s central bank will follow the RBA lead and raise its benchmark interest rate. In fact the Bank of Canada has a long standing policy of maintaining a ‘sticky float’ for the CAN$. The goal of this policy is twofold: (a) prevent disruption of Canada’s international trading position caused by too rapid or erratic changes in exchange rates and (b) maintain the freedom of the Canadian government and central bank to set internal monetary and fiscal policy to meet Canadian domestic requirements. Care has always been taken in following this ‘sticky float’ policy not to fall into the temptation of competitive devaluation which would only invite retaliation (a tit for tat situation that could only harm Canada’s international trade in the longer term as well as defeat the goal of that policy stated above). The stage is, however, set by current events for moderate intervention to slow CAN$ appreciation.

During the past 24 or so months Canada has fared relatively well economically in part because, like Australia, it had put its economic house in order and also benefited from continuing demand for agricultural and community products. Canada in the mid 1990s went through tough streamlining of national and provincial fiscal and monetary policies and social programs; think restraint on bank expansion and amalgamation, public pension reform, balanced federal and provincial budgets, Medicare cost containment etc. We, thank God, resisted the temptation to allow our banks to merge and participate as major players in the emerging secularized debt and derivative market and we required the banks and credit unions to maintain high capital to loans ratios and continue sound mortgage and consumer lending practices (for the most part). In short, we cleaned up our act because it was obvious that if we didn’t the IMF would come calling some day and that would not be fun. Thus Canada entered the recession in especially good shape. However, for the reasons set out below, there are significant limits on Canada’s capacity to grow and prosper further until the US and EU recovery is well under way. Australia, by contrast, benefits uniquely at present from the demand for its products from China.

It is useful to add the observation that the typical pattern for Canada since WW II has been late entry into global recessions (i.e. there is a lag before foreign orders for products dry up) but its recessions deepen and drag on longer than those for her trading partners (i.e. recovery must be underway abroad before foreign orders for Canadian products pick up). Arguably this is because Canadian producers and manufactures sell a large share of their production into foreign markets and a large portion of Canadian foreign sales are tied to commodities. The Canadian Government and the Bank of Canada will now want to keep domestic interest rates and the exchange rate of the CAN$ low to off-set the negative effects of the continuing recession.

In recent months the lag in foreign orders for Canadian products, the impact of the rapid recent increase in the exchange rate for the CAD$ in US$ terms, the problems in the automotive manufacturing industry and the slowdown of development in the high cost, capital intensive oil sands sector have all served to accentuate the impact of the recession in Canada. In short, the historic trend for global recessions to deepen and be prolonged in Canada may still apply; especially if the global recovery is anemic and slow. It follows that the ‘sticky float’ policy historically followed by the Bank of Canada is more likely in the near term to become sticker than that its benchmark interest rate will be raised.

Nov 03 05:42 PM