After a month of sounding more upbeat, Mark Carney heads into a key week for Canadian monetary policy with the economic outlook almost as murky as ever.
The Bank of Canada Governor may well have hoped to use a policy decision this Tuesday, and a quarterly economic forecast the next day, to reshape expectations about when he will lift his main interest rate from the current 1 per cent for the first time since September, 2010.
Mr. Carney is surely aware that his campaign to warn households about the dangers of binging on cheap debt is not affecting consumer behaviour anywhere near as much as an interest rate hike would. And while he has said there are limits to how much his benchmark rate can diverge from the U.S. Federal Reserve's near-zero rate in order to keep Canada's currency from soaring, he cannot be happy with the assumption that has taken hold among investors (and borrowers) that his hands are mostly tied until the Fed is slated to start tightening again – in 2014.
As things started looking up over late winter and early spring, both at home and abroad, Mr. Carney appeared to be seizing the opportunity to counter the notion that low-for-long necessarily means low-for-a-great-deal-longer.
If it was a conscious strategy, it was starting to work. Markets tied to future interest-rate levels still reflect a sense there will be no move until next year. But a string of comments from Mr. Carney – such as his last decision in March when he said the economy was recovering more quickly than expected, and in an April 2 speech when he said "headwinds" like the euro crisis were abating – fuelled debate on Bay Street about just how "hawkish" he might sound this week.
"They would very much like the market to be expecting them to raise rates at some point over the next few quarters," said Michael Gregory, a senior economist with BMO Nesbitt Burns. "Higher long-term interest rates would go a long way toward raising mortgage rates to higher levels, which would help cool housing further. To me, the hawkish rhetoric is designed to do that."
But by late last week, with fears the euro crisis could flare up again, signs the U.S. recovery may have hit another wall, and a report indicating the slowdown in China's economy is worsening, analysts were second-guessing whether the global backdrop – crucial to Canada's export-heavy economy – has really brightened much at all.
"On the ground, things have become a little less certain again," Mr. Gregory noted. "You and I may be talking Tuesday about how they have become doves again."
Domestically, conditions argue for a clearer hint from the central bank that interest rate hikes are coming, and likely sooner than expected.
The bank's latest survey of Canadian businesses, released last Monday, found executives are more optimistic about future sales than they've been in two years, in part because they've taken steps to make themselves more competitive as Mr. Carney has been urging. A few days earlier, Statistics Canada reported that March was the best month for job creation since 2008.
Most evidence suggests inflation is under control. For some economists, though, it is high time the central bank gets ready to break its longest pause in six decades.
"If a few weeks later something happens in the U.S. or Europe, it's not like you've made a massive move," said Chris Ragan, the C.D. Howe Institute's David Dodge Chair in Monetary Policy, adding that Mr. Carney should start hiking this June to slowly arrive at a 2-per-cent rate a year from now. "All you've done is signal you'd like to be going up. And, each time, you've sent a message to people that are accumulating lots of debt, and to people building condos."
Others, though, stress the risk that higher borrowing costs could spark a nasty correction in the housing market, or cripple overstretched consumers' ability to spend at a time when they are already struggling with high gasoline prices. (Indeed, Mr. Carney has said his new forecast will include an analysis of how global oil prices affect the economy. If he concludes that at certain price levels, the impact on consumer behaviour cancels out some of the benefits of being a major oil-producing nation, that would be more reason to think twice about speeding up a rate increase.)
Plus, on top of last week's reminders that the global rebound remains fragile, Derek Holt of Scotia Capital points out that banks are scaling back on lending as they adapt to tougher global financial rules, Ottawa and the provinces are entering a period of belt-tightening, and brutal fiscal restraint in the U.S. is expected to begin soon after the presidential election.
Taking all of that into account, Mr. Holt said he suspects the central bank's forecast this week may downgrade its January forecast of 2.8-per cent growth for Canada next year, which would strongly suggest there is no rush to start raising interest rates.
"There's a long list of reasons why [Mr. Carney]should be very careful about pulling away the punch bowl," Mr. Holt said. "We're getting other forms of tightening, even if he stands pat."