The Bank of Canada can finally see “home” on the horizon.
Governor Stephen Poloz and his deputies on the Governing Council raisedthe benchmark interest rate a quarter-point to 1.75 per cent on Wednesday, as expected.
They said they feel pretty good about the economy, now that politicians in Canada, Mexico, and the United States have agreed on a revised trade agreement, and that evidence suggests households are adjusting well to higher borrowing costs. Policy makers raised their outlook for business investment and exports, suggesting the economy is becoming less reliant on debt-fuelled spending and the housing market.
“The Canadian economy continues to operate near its capacity, and growth is relatively broad-based across sectors and regions,” Carolyn Wilkins, the senior deputy governor, said at a press conference in Ottawa. “What stands out is that, even with today’s increase … monetary policy remains stimulative.”
Wilkins’s emphasis on the still-low level of borrowing costs was a reminder that the public needn’t panic at the sight of marginally higher interest rates, and a gentle warning that no one should expect interest rates to stay at this level.
The economy is growing a little faster than the Bank of Canada predicted a few months ago, and “vulnerabilities” from elevated levels of household debt are “edging lower,” it said. Policy makers reiterated that interest rates must rise, and for the first time offered a more definitive notion of where it wants to go.
“Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target,” the bank said in a statement explaining the latest policy decision.
Poloz, who took over as the governor of Canada’s central bank in 2014, has talked wistfully about returning interest rates to a level that economists associate with normal, a place where the cost of money is neither stimulating expansion nor curbing growth. The central bank estimates that “neutral” interest rate — which Poloz has characterized as “home” — is something between 2.5 per cent and 3.5 per cent.
There will be a debate on Bay Street and Wall Street about how fast the Bank of Canada wants to close the gap between the neutral rate and the current setting. Analysts tended to call the central bank’s latest communication “hawkish,” a widely used term that implies the central bank is more apt to raise interest rates than to cut them or leave them unchanged. The value of the dollar jumped in the minutes following the release of the policy statement, as traders noticed that “gradual” had been dropped from the text. Policy makers had used that modifier in three consecutive policy statements to make sure the public knew that the economy was facing a lot of headwinds.
There will be a temptation to assume the central bank’s decision to take out the eraser is a signal that interest-rate increases will become more frequent. In fact, the Bank of Canada’s outlook is about the same as it was a few weeks ago; if there’s a shift, it’s that policy makers are more confident that outlook will come true.
More likely, Poloz, who has made a point of avoiding explicit guidance, wanted to keep investors and others from reverting to their old habits of putting textual analysis ahead of number crunching. The new policy statement says the pace of interest-rate increases will be determined by “how the economy is adjusting to higher interest rates, given the elevated level of household debt” and “global trade policy developments.” The resolution of the North American trade dispute is a relief, but the central bank expressed heightened concern of the U.S. trade war with China.
“You may have noticed that we have not used the word ‘gradual’ to describe the pace of policy adjustments,” Wilkins said. “This is to avoid the impression that we are following a preordained, mechanical path.”
Poloz acknowledged that the new wording gives the Governing Council more flexibility, but that he and his lieutenants have no idea how they will use that maneuverability. He said he was prompted to make the change because the Street had come to associate “gradual” with an increase every couple of meetings. “This is serving notice that it could be faster or it could be slower,” Poloz said.
That’s probably right. The numbers suggest interest rates could be higher, but that understanding of how the economy works is based on periods when household debt was much lower than it is now. The central bank went out of its way to say that even though it’s comfortable with the way Canadians are adjusting to higher borrowing costs, household vulnerabilities “remain elevated.” Wilkins also said stronger business investment probably means the economy has more capacity to produce inflation-free growth. If so, the central bank’s path “home” could still be gradual, although policy makers might refrain from calling it that.
“It’s amazing how markets can focus on one word,” Tom O’Gorman, director of fixed income at Franklin Bissett Investment Management in Calgary, said. “They are going to be data dependent and that makes sense.”
B.C.'s NDP government has struck a deal with its power-sharing partners, the B.C. Greens, to tweak the new speculation tax and assure its passage into law.
ROB SHAW (VANCOUVER SUN) VICTORIA — Finance Minister Carole James saved her government’s marquee housing tax from defeat Thursday by agreeing to change several details to mollify the B.C. Greens.
Green Leader Andrew Weaver announced he will support the NDP’s speculation tax, in return for changes that include cutting the tax rate for Albertans and other out-of-province Canadian owners and requiring require tax revenue be spent on affordable housing projects in communities where the tax is received.
“We’ve come to a good place where the key aspects of the concerns have been addressed — not all of them, but the key aspects have been addressed recognizing we would have done things differently but we have shared values,” said Weaver.
But Weaver quickly found himself on the defensive because he’d failed to achieve a promised opt-out clause for mayors who worry the tax could harm economic development and housing construction in their communities. Instead, Weaver secured annual meetings among the mayors and James.
“The Green caucus wanted to allow municipalities to opt out, but that wasn’t acceptable in my opinion,” said James. “So we’ve come to a compromise, where mayors will have the opportunity to bring forward the impacts on their communities directly once a year in a formal meeting.”
That will be useless, said some mayors, because meetings with James so far have failed to influence her decisions.
“We meet with (Finance Ministry officials) all the time, so I guess I’m a bit perplexed,” said Kelowna Mayor Colin Bansran. “They didn’t listen, so I’m not really sure what regularly scheduled meetings would do to make them change course.”
“We’re disappointed in Mr. Weaver, quite frankly,” added West Kelowna Mayor Doug Findlater. “I’d met with him at UBCM and I thought he was going to hold out for much more.”
The Opposition Liberals piled on criticism, describing the changes as “a half-baked compromise” that “sold out” local communities.
“What the leader of the Green party did was let down all the people who were counting on him,” said Liberal finance critic Shirley Bond. “What he got today is an embarrassment.”
The changes are the third rewrite of the speculation tax since the tax was announced in February’s budget.
James exempted Gulf Island properties from the tax in March, and reduced the tax rate from two per cent to 0.5 per cent for B.C. residents.
The version of the tax she put forward this week contained new exemptions for developers working on housing projects, and for people suffering medical emergencies, employment changes and marriage breakups.
The final version of the speculation tax will include the amendments offered Weaver.
One of those cuts the tax rate for out-of-province Canadian owners of second homes in B.C. from one per cent to 0.5 per cent. It means an Albertan will pay the same speculation tax rate as a British Columbian with a second home. Foreigners will still be taxed at two per cent of assessed property value.
The speculation tax will apply to those who own multiple properties in Metro Vancouver, the Capital Regional District (excluding the Gulf Islands and the Strait of Juan de Fuca), Kelowna, West Kelowna, Nanaimo-Lantzville, Abbotsford, Chilliwack and Mission.
Owners are exempt if they rent their properties out for at least six months a year. And there is also a tax credit for B.C. residents with second homes valued under $400,000.
The changes will mean government’s revenue expectations from the speculation tax drop from $200 million to $170 million a year, said James.
Oak Bay mayor Nils Jensen, who has warned anger over the tax could bring down the NDP government, said Thursday he thought the changes were positive and fixed many of the problems.
“Their consultation idea for every year is somewhat positive, but I would have thought they would have done that in advance,” he said. “Be that as it may, on balance the overall amendments are very positive and supportable.”
Jensen said the changes will allow mayors to bring actual figures on the impact of the speculation tax to the finance minister annually. But he acknowledged there will be “divided opinions” among mayors.
“I think the mayors who had the impact on the overall economy as their concern will not be happy with this at all,” said Jensen.
Weaver said the changes to the speculation tax represented a compromise that was workable for both the NDP and Greens. He pushed back on the suggestion the Greens could have extracted more from the NDP by threatening to withdraw their support for the minority government.
“We want this government work,” said Weaver. “We believe our role in opposition is to make legislation better, not to force elections every six months, and we’re working our darndest with government to make sure legislation is improved for the betterment of British Columbians in a way we can live with. And we think many of the concerns that were brought to us, are dealt with.”
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