The Bank of Canada and Alberta’s boom
In the Globe and Mail it is reported:
A flurry of increases in the past month has sent Canadian mortgage rates to their highest level in more than five years, and consumers shouldn’t expect a return to the low interest rates they enjoyed in the first half of the decade.
The story quotes Benjamin Tal of CIBC World Markets, commenting on the driver of this bus â€“ the Bank of Canada’s anti-inflationary zeal:
“Canada is actually not doing great if you take Alberta out of the story. Quite frankly, if there was a Bank of Canada minus Alberta, it would not be talking about higher interest rates … and might even be suggesting rates should be going down.”
This is a double-whammy for the rest of Canada, already adversely affected by rising energy costs, for which Alberta is the primary beneficiary. This spurs Chinese levels of economic growth in Alberta which puts upward pressure on prices. Alberta’s inflation rate is now about 5%, although there is no evidence this is cause for concern. It has, interestingly, led to some perverse economic policies in labour market as temporary foreign workers have been flown in, rather than letting the market work by having wages increase (so much for letting “the market” decide).
Anyway, as a result, the Bank of Canada starts making noises about inflation, even though, as Tal notes, this is essentially an Alberta issue (to the extent that it is an issue at all) and the current national inflation rate is 2.5%, which is within the Bank’s own band of 1-3%. Back when inflation rates were on the low side of the target range, the Bank did not signal to the markets that it was about to lower interest rates (in the jargon, it behaves asymmetrically). The Bank, of course, only controls very short-term rates (ie. overnight rates) but these ripple through the rest of the interest rates in the financial system. So the signal that the Bank may increase rates has already led to increased rates for mortgages and other short- and medium-term loans.
So it’s Alberta’s party, the Bank wants to take away the punch bowl, and most of us haven’t even taken off our jackets yet. Here is where I disclose my conflict of interest: I have to renew my mortgage in a few months time. Back in 2004, I was able to lock in for three years at a sweet rate of 4.3%; now I’m looking at renewing at 6% or more, and every ripple the Bank sends through the markets is costing me money, baby.
A huge problem in this is that raising interest rates is the bluntest instrument out there, but the only one the Bank has. And as the saying goes, to a child with a hammer, everything looks like a nail. But if this is just an Alberta problem, how about an Alberta solution, like slowing the growth of oil patch extraction? This would be a good thing on many fronts, as it would also help our greenhouse gas problem. And it is not like that oil is going anywhere; we should plan on extracting it at a sustainable rate, rather than blowing it in one shot like an 18-year-old who just got an inheritance.
Back at the CEA meetings there were some interesting discussions among us progressive economists about the Bank’s obsession with inflation. Their latest mantra-in-waiting is “targetting the price level”, which sounds a lot like the disaster that was “zero inflation” pursued by John Crow in the early 1990s. Brenda Spotton-Visano argued that the Bank really has no idea how monetary policy is transmitted through the economy, despite reams of technical papers based on computer models, but instead says it is about the perception of being “tough on inflation” to the financial markets who trade our dollar each day.
My prediction: David Dodge is leaving as Bank governor very soon. I’m betting he leaves some room for his successor to ride in and raise rates to demonstrate his (it will probably be a he, won’t it?) anti-inflationary street cred to the financial markets. But it is mostly a show, about the perceptions of Canada being inflation fighters. That is too bad, because it precludes a better policy of Canada pressing for full employment.