Softly softly

As expected, the Bank of Canada held its target rate unchanged after its Governing Council meeting today.  Governor Stephen Poloz's statement to the media indicates that the Bank still thinks that rates will have to move to a more neutral level over time, but it is clear that the pace of any further tightening will be slower than seemed likely just a few months ago. 

The Bank acknowledges that the US-inspired trade war is starting to have an impact on Canada's growth prospects, but its main focus is clearly on the problems of the domestic oil sector.  In effect, the Bank faces a dilemma -- the economy of Alberta, in particular, desperately needs continuing policy support, while the situation in most other parts of the country calls for further tightening.

Governor Poloz illustrated this point by quoting two recent employment-related statistics. He noted that the overall gain of about 9000 in national employment reported for December was made up of a sharp decline of 17,000 jobs in Alberta but a solid gain of 26,000 positions in the rest of the country.  Further, the Bank appears to attribute the slowing pace of wage gains in the second half of 2018 to the energy sector as well.  Gov. Poloz observed that year-on-year wage gains in Q3/2018 stood at 1.8 percent in the oil producing provinces, but 2.6 percent in the rest of the country.  That discrepancy surely widened further in the final quarter of the year.

The Bank has now lowered its forecast for GDP growth this year to 1.7 percent from 2.1 percent previously.  It has also marginally cut its inflation outlook for the immediate future, though it still expects CPI to move back up to the 2 percent target by year end.  These revisions mean that any further movement back toward a neutral rate will be very slow -- it is very likely that rates will not be lifted again until after mid-year, and there are even a few media commentators now suggesting that the Bank's next move could be a rate cut.

In the meantime, while the current level of interest rates still seems impossibly low to those of us with long memories, the Bank's cautious rate hikes to date are starting to hurt vulnerable households. As this report indicates, the number of household seeking debt relief in the final quarter of 2018 was the largest since the peak of the financial crisis in 2011.  Just one more reason for the Bank of Canada to proceed with great caution.