- Bank of Canada Deputy Governor Tim Lane spoke this morning in Ottawa as part of the Bank’s Economic Progress Report series. These speeches are meant to provide further colour on the Bank’s decision-making following meetings (like yesterday’s) that do not come with a Monetary Policy Report.
- The title of today’s speech was ‘Charting Our Own Course’, and the messaging was captured effectively in the title. DG Lane spent some time dispelling the perception that the Bank of Canada must follow the Federal Reserve’s actions. His examples included the different courses of action during the Great Recession – notably the very different post-crisis paths that saw the BoC hiking rates three times in 2010, while the Fed kept near-zero rates for more than five years. Another example of divergence was the 2014-2016 oil shock that saw the Bank of Canada cut its policy rate twice.
- Other divergences between the economies include the behaviour of both housing both before and after the Great Recession (notably, macroprudential measures here), and, perhaps most importantly given the Bank’s mandate, below-target inflation in the U.S., but effectively 2% inflation here.
- Coming to the current period, the messaging was consistent with yesterday’s rate decision. Externally, it is a story of mixed messages on the trade backdrop, but domestically, spending measures have pleasantly surprised. The Bank’s expectations for a contraction in non-residential business investment were met not only by an expansion, but also an upward revision to recent history. The Bank will be assessing this more closely in the coming weeks to determine how durable the expansion is. Housing was also noted as an area of strength.
- Lane walked through all the major areas of the economy, but the bottom line is that the Bank sees the Canadian economy as operating near its capacity, although this headline hides divergent regional stories. Inflation is expected to trend around the target, near-term gyrations aside.
Key Implications
- This sounds like a Bank that does not want to cut rates unless absolutely needed. It is hard to imagine more clear a way to communicate this than a speech focused in large part on how Canada has diverged from its international peers in the past. As well, fiscal policy also figured prominently in both the historic discussion and the outlook – particularly notable given today will bring a new Throne Speech that outlines the government’s priorities, likely to set up a reduction in personal taxes and other stimulative policies, consistent with campaign promises.
- The core concerns remain the same: caution around financial stability risks, particularly given the uptick in household credit growth of late, but also the durability and resilience of growth given the global backdrop.
- The Bank remains clear in the barometers it will be watching to assess the resilience of the Canadian economy: consumer spending and housing activity remain front and center.
