The "business" section of the Toronto Star is not usually a place you'd turn to for serious analysis. It's normally full of articles about how banks or utilities are gouging their clients for unjustified fees, or profiles of individuals whose poor financial management has got them into trouble. Remarkably, however, today's print issue has two weighty articles about the kind of topic that I used to get paid to analyze, back in the day. Let's scrape off some of the rust and take a look.
We begin with an article about whether the City of Toronto's borrowing costs have been affected by the Rob Ford circus. I approached this with some trepidation: remember how, at the height of the Eurozone crisis, there were almost daily scare stories about how Italy would be unable to service its debts if its bond yields reached 7 percent? The specific number seemed to be plucked out of the ether, and the authors never seemed to note the fact that, since most of the country's borrowings were for long terms at fixed rates, it would require market rates to stay at or above the 7 percent level for many years before Italy's actual debt service costs would even begin to approach that level.
It's good to be able to report that the Star's piece avoids any such errors. It correctly points out that the city's borrowing costs are fixed, and further notes that since no further bond issuance is likely until mid-2014, any short-term move in Toronto's bond "spread" (the gap between the yield on the city's debt and that of the Government of Canada) is effectively insignificant. The article even ventures to suggest that changes in Toronto's bond spread may be driven not by events at City Hall, but by changes in the spread for Ontario bonds, since the Province is seen as the "backstop" for Toronto's debt. It's a sensible and informative piece of work, so kudos to the writer, Dana Flavelle.
Let's now turn to a piece on the Bank of Canada, which was warned this week by the OECD that it might need to start raising interest rates before the end of 2014. The Bank's new governor, Stephen Poloz, has been much more reticent than his predecessor, Mark Carney, about predicting (sorry, "providing guidance") about where rates might be heading, but he has been quick to react to the OECD's suggestion. He doesn't agree that rates will need to rise that soon, based on the Bank's own analysis of the degree of slack in the economy and its view that inflation, currently at 1.1%*, is "lower than the Bank would like it to be".
That's the sort of statement that still gives me the heeby-jeebies, what with me having spent more than half of my professional career watching central banks struggling mightily to get inflation under control. It will be interesting to see whether Poloz is right about this. The aforementioned Mark Carney is sounding less confident about keeping UK rates on hold for as long as he had previously expected, and the latest FOMC minutes have got US and global markets fretting again about a possible end to QE as early as December. (For what it's worth, I don't think that will happen. I think it will be left to new Fed chief Janet Yellen to initiate the QE "taper", which would help her to allay market fears that she's too wedded to cheap momey).
As the Star article points out, the Canadian dollar fell in response to Gov. Poloz's comments, and it can only fall further as the inevitable end of US QE comes into view. That would quickly give Poloz the higher inflation he appears to crave, and start the countdown toward a tightening cycle in Canada. The first rate move probably won't come before the end of 2014, but it's unlikely to be much later than that.
*UPDATE, November 23: But hey, what do I know? The day after I posted this, StatsCan reported that inflation fell to 0.7% in October -- something which Poloz presumably knew when he made his comment about the rate being too low.
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