The Bank Moves to Hit the Ball

The release of today’s Monetary Policy Report from the Bank of Canada follows yesterday’s announcement of no change in interest rates, the latest in a long series.  It reminds me of an English County cricket match in which a batsman is politely applauded – “very well not played, sir!” – for doing absolutely nothing other than watch a potentially dangeous pitch fly by slightly wide of the wicket. 

Of course, Carney did more than nothing by not so subtly signalling – through elimination of the word “eventually” with reference to removal of monetary stimulus – that he is going to probably raise rates fairly soon, unless, of course, things change.  That gesture alone was sufficient to significantly drive up the exchange rate of the Canadian against the US dollar.

What I find suspect is the Bank’s view that the output gap will disappear in less than a year, by mid 2012. While this simply restates the view taken in the previous report, the fact that we are supposedly closing in on capacity as expected seems to be the reason why interest rate hikes may be coming.

The Report is, as always, quite nuanced. But the overall tone is unduly optimistic given some key changes in the global economy in recent weeks.

Not only is the US economy slowing quicker than thought, the end of  the last stimulus package seems set to be succeeded by even greater than forseen public sector austerity as the Tea Party drives the political agenda. And there now seems little prospect of further quantitiative easing, which could mean an increase in long term US interest rates moving forward. 

Meanwhile, as the Report notes, the EU recovery overall has been fairly robust. But the stage now seems set for a major shift to fiscal austerity and to higher interest rates in Spain and Italy as the sovereign debt crisis intensifies and moves from the periphery to the centre.     

Here in Canada, the Bank expects net exports to grow, even in the face of a very weak US economy and a very high Canadian dollar. And they expect fairly strong business investment growth to continue despite the US slowdown and the high dollar. That boils down to a pretty serious bet that high commodity prices and resource exports can carry the whole economy.

The Bank are not blind to the fact that the labour market remains weak. But it is worth underlining just how much slack there is in the job market today compared to the period before the crisis. Compared to October, 2008, the unemployment rate is up (from 6.1% to 7.4%), the employment rate is down  (from 63.5% to 62.0%) and the proportion of both part-time workers and involuntary part-timers has risen. The “real’ unemployment rate last month  – which counts labour force dropouts and involuntary part-timers – was 10.7%.  I know that the output gap is about more than the job market, but that doesn’t sound like closing in on capacity to me.  

Some will cite the threat of inflation as a reason to remove monetary stimulus. But the Report makes it clear that core inflation is pretty much in line with the 2% target, and that the factors feeding into a higher rate of increase of the CPI are transitory.

Putting it all together, the Bank seems unduly optimistic about where we are headed, and overly anxious to hit the ball.

One comment

  • It is not just the direction they are getting wrong- it is a lack of any ideas save developing resource extraction that is quite problematic.

    I wonder if oil was near $60 if they would have been so seemingly dollar insensitive with their projections yesterday. The central bank and Harper in particular are taking a huge gamble with the economy right now. Nothing to slow the dollar down, I cannot believe they mentioned inflationary threats. Any notion of aiding manufacturing in central Canada could have easily been accomplished by not being so hawkish on inflation. They must be trying to destroy manufacturing, and the central Canadian economy, that must be the conclusion, as the dollar went up a cent and a bit yesterday to break 1.05 and pushing 1.06. Do they really think auto will stay in Canada at 1.10? At some threshold, and we are coming up to it, a high value adding exodus will be motivated by Harper fetishism with Oil.

    They could have very easily kept the dollar down yesterday, with a whole lot more pessimism on the economy and it would not have taken billions in subsidy to corporation. And again Harper states that he does not manage the economy, well to me he just did that again yesterday. So much for self regulation, with all the turmoil south of the border and the slowdown, how can the bank paint such a rosy picture?? I just do not get the level of economic insensitivity to working families in central Canada- we shall soon all be flipping burgers and scanning a till- what a waist of a workforce at a time when the planet and the globe needs a economic leader out of this decline and decay.

    The middle sure is hollowing out!

    HAppy summer vacation to all the pef’ers

    By the way, I am in the proposal stage of creating a new statistical index that will measure Employment/Job quality. It will be more focused on the macro issues of Job quality rather than the traditional issues of micro job quality.

    If you are interested in finding out drop me a line.

    The European Trade Union Institute for Research, Education and Health and Safety has tried to develop a similar but potentially more micro job focused than what I am trying to do. It is common knowledge that there has been a huge data gap in our employment statistics and with the dramatic rise and fall of the economy we need more than ever a measure of employment quality within the workforce. The number of unemployed was a measure of the mass production era, well times have changed and a simple count of jobs is not longer sufficient to feed policy. With the decline of standard work arrangements over the past 20 years , it is long over due to have a measure to assess the nature of precarious work. I have some steering group members involved already, but have room for more. Also looking for a place to house the project. So do not be surprised if I come knocking on your door!

    I will succeed at this and within 18 months we will have a measure and it will be legitimized, robust and scientifically measured. (unlike the CFIB who refuses to provide a methods paper on the flimsy index they publish)


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