David Herle is the Principal of the Gandalf Group
When it comes to the Bank of Canada and an interest rate hike, is it a case of "damned if you do and damned if you don't"? That is a question that emerges from the responses of leading executives in this edition of the C-Suite Survey.
The survey confirms what other indicators have shown – the economy is in reasonable shape. Most positively, the past three quarters have seen executive confidence in their own companies stay at a higher level than we have seen in years. Some published forecasts are projecting economic growth in the 3-per-cent to 4-per-cent range in the near term.
Executives are not that optimistic about the year ahead. There is at least virtual unanimity within the C-Suite that the economy will continue to grow.
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Various economic reports and data have fuelled discussion that the Bank of Canada ought to be raising rates. Some have come at it from an economic perspective, saying the overnight rate is comparable to emergency-level rates, and asking why it has remained at those levels for so long.
Others, including the Trump administration, approach it from a political and trade perspective. With a robustly growing economy built in part on a Canadian dollar in the low-70-cent range versus the U.S. greenback, Canadian monetary policy is actually an economic stimulus program. This will be an issue in the North American free-trade agreement negotiations.
Yet, raising the lending rate is not an obviously straightforward or easy policy option to exercise. Leave aside the reams of data indicating that heavily indebted citizens have little capacity to absorb higher debt service costs without bankruptcies and foreclosures. This survey indicates that the business opposition to higher rates would be as virulent as the consumer reaction.
Most business leaders think a rate increase would hurt the economy. Indeed, almost none is bullish about the Canadian economy, despite the recent release of some positive indicators. After the initial enthusiasm for the pro-business, low-tax vision advanced by the U.S. government, executives are now less optimistic about the U.S. economy than they were three months ago. Many are worried about significant challenges to North American growth should the Trump administration threaten both NAFTA and Canadian exports.
Many also think a rate increase would hurt their business. An increase in the cost of borrowing is a threat to both their ability to service existing debt and their ability to invest.
Additionally, the business community does not want a monetary policy that drives up the value of the dollar. Many are comfortable with the Canadian dollar at or near the current value.
Many are, in fact, counting on the dollar to stay where it is. Fewer than one in five businesses is basing its plans on a dollar over 75 cents. Most would be fine if it went lower, toward 70 cents. An even lower dollar would help most businesses and boost the economy, say Canadian executives.
It does not appear possible to increase interest rates in Canada without incurring the wrath of both business and consumers, and creating significant dislocation.