There seems to be very little reason for the Bank of Canada to hold off on raising rates when its Governing Council meets on July 12. Start with the fact that Governor Stephen Poloz has taken his newly hawkish message on a virtual world tour: after first broaching the subject of higher rates in an interview in Winnipeg, he delivered the same message at an ECB-sponsored conference in Portugal, and this week followed that up with yet more of the same in an interview with a major German newspaper.
It's a mistake for a central banker to send those kinds of signals and then not follow up, particularly as the flow of economic data in the past two weeks has been generally supportive of the case for higher rates. In particular, the latest set of employment data, released earlier today, shows continuing strength in the labour market. The economy added 45,000 jobs in June, which caused the unemployment rate to tick down to 6.5 percent.
Although most of the jobs were part-time and most of the gains were seen in just two Provinces (Quebec and BC), the June report means that the economy has added 351,000 jobs in the last year, the fastest pace for any twelve-month period since 2009. Almost 250,000 of those jobs have been full-time, with the result that the number of hours worked in the economy has grown by 1.4 percent in the past year.
The strong gains in employment through the entire second quarter -- up 0.6 percent over Q1 -- are a clear signal that the strong GDP growth seen in the final quarter of 2016 and the first three months of this year has persisted. April GDP data, released a week ago, appeared to confirm this, with GDP by industry posting a 0.2 percent month-on-month rise. Aside from a pullback in manufacturing, the gains were broad-based -- and in a uniquely Canadian touch, StatsCan noted that strong growth in the arts, recreation and entertainment sector was driven by the fact that five Canadian teams reached the end-of-season hockey playoffs! (As this is a serious blog post, we will pass over the fact that the final saw Pittsburgh triumph over Nashville).
Given the strong macroeconomic data, what could hold the Bank back next week? The only real candidate is the housing market, which seems to be on the verge of a full-scale correction, especially in the Greater Toronto region. The average selling price for a home in the region fell by 8 percent in June; any comparable decline in July would see the year-on-year change, which topped 30 percent in the first part of this year, slip into negative territory, which would be quite remarkable. Rising listings and a falling number of completed deals are further evidence that the market has changed drastically since the Provincial government introduced its package of calming measures back in April.
You can certainly make a case that housing has been a major driver of the economy in recent years -- but not in any sense that a prudent central bank would be likely to favour. Low interest rates have largely failed to encourage any increase in new home construction, even though this is much needed. Instead, what they have driven is a rapid increase in household debt, initially in the form of mortgages, but more recently in the pernicious shape of home equity lines of credit (HELOCs), which have been showing explosive growth.
It may well be the case that a rate hike by the Bank next week will curb consumer behaviour, though it's worth noting that the Bank will, if anything, be lagging the market here: banks are already raising their mortgage rates, so the highly-indebted consumer is about to get squeezed whether the Bank does anything or not. Monetary stimulus will have to be removed at some stage, and with the economy in its best shape in almost a decade, this is looking like the right time to start. A 25 bp rate hike seems certain to come on July 12, with the Bank possibly signalling one further hike before year end, assuming of course that the data flow remains favourable.
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