Despite some tweaks to its language, the Bank of Canada still wants to be convinced that exports are really on the upturn and business capital investment, so long disappointing, is following, before it reduces the stimulus in its 1.0% policy rate.
To Governor Stephen Poloz, parsing the economy and judging what to do is heavily about jobs, about a labor market stalled in full-time work. And here the central bank’s rate decision Wednesday indicates that it remains unsure whether exports and business investment, the factors that will reinvigorate hiring or leave it mediocre at best, are truly trending up. The big Q2 pickup in exports has to be sustained in order for jobs and business investment to improve, the Bank took pains to emphasize.
A week from Wednesday, on September 10, the Bank’s key overnight rate will have rested at 1.0% for exactly four years. The brief statement Wednesday made it plain that this rate will continue for quarters to come in order to further encourage businesses and to keep the Canadian dollar down around the 90-odd cents U.S. where it has rested for some months (91.98 cents US Wednesday morning). Many analysts peg that change, a hike, as first occurring in late 2015. Nothing on Wednesday would detract from that view.
The Bank also said it remains neutral on when the next change may occur and whether the change could be a hike or a cut. The latter, a cut, seems to altogether unlikely but may be left as a possibility because any change is so far off that over such a long time anything might happen. The Bank says any change as to timing and direction will be data-dependent, as it has said all along. That data will depend heavily on exports and business investment replacing consumer spending and housing activity as pillars of the economy.
Exports took a surge upward in Q2, by 17.8% over a very weak Q1 (+1.7%). The Bank of course paid attention to that, saying it notably was due to returning United States demand and the weaker C$. It most likely would want to keep the C$ about where it is, while it retains a somewhat skeptical eye on U.S. demand.
Although the Bank has ostensibly changed its tune on U.S. recovery, from uncertainty about it to feeling that “a solid recovery seems to be back on track,” the Bank still wants to be convinced that exports are truly on the rise. It was quick to add that “while an increasing number of (Canadian) export sectors appear to be turning the corner toward recovery, this pickup will need to be sustained before it will translate into higher business investment and hiring.” The U.S. takes more than 70% of Canada’s goods exports.
A turn-around in the U.S. economy will not necessarily straight-line translate into higher demand for Canadian goods, because the international competition for sales to America is increasing. The Bank has noted this before and said that Canada’s productivity, its competitiveness, will need to improve to meet that competition.
In a mostly status quo statement accompanying the rate decision, the Bank did make some changes in approach. However, the statement acknowledged that housing market activity has of late been stronger than it had expected, suggesting concern about mortgage debt. Gone suddenly are the previous references to “soft landing” seen for the housing market or that household debt, while historically high, is “evolving constructively.” Now, the Bank only says that risks to the economy posed by household debt “have not diminished,” and leaves hanging what one is supposed to take from that.
The Bank continues to see inflation risks as “roughly balanced” and no need on that account to change the rate.
But the key take-away is that the Bank still only sees the economy moving back to full production potential during “the next two years.” It said in July that would occur in mid-2016, moving the time up slightly from late 2015-early 2016 that it had expected earlier.
Overall, the BOC said, the balance of risks “is still within the zone for which the current stance of monetary policy is appropriate and therefore the target for the overnight rate remains at 1 per cent.”
It added, “The Bank remains neutral with respect to the next change to the policy rate: its timing and direction will depend on how new information influences the outlook and assessment of risks,” clearly indicating there will be no change for some quarters to come.