Canada's gloomy old central bank governor Stephen Poloz has put on a happy face.
Much of the commentary both before and after yesterday's quarter-point rate hike — the first by the Bank of Canada in seven years — has been downbeat.
Perhaps influenced by the many who benefit from low rates and the high levels of borrowing it encouraged, much of the media emphasis has been on the damage a rate hike would cause.
According to that outlook, that huge load of debt, the albatross hanging around the necks of over-borrowed Canadians, was only going to get heavier.
But that was not the message from Poloz and his deputy Carolyn Wilkins at yesterday's policy-focused news conference.
Good news for Canada
Even the gloomiest questions couldn't bring Poloz and Wilkins down.
"The most important thing here is that this is good news for Canada," Poloz told reporters in an uncharacteristic flight of good cheer. "The accumulation of evidence and the growth in our confidence that the economy is on a solid trajectory should be good news for everyone."
That includes people with mortgages.
While he and Wilkins were careful to hedge their bets with the warning that perfect predictions of the economic future are always uncertain, the tone was almost bubbly.
There is no question consumer interest rates are going up. Within an hour of the Bank of Canada news conference, Royal Bank of Canada had hiked its prime rate by a quarter of a percentage point, automatically pushing up the monthly costs of credit lines and variable-rate mortgages. Other banks quickly followed.
Asked about the impact of rising rates on mortgage holders, Wilkins insisted Canadians must see any increase in the context of an "economy where employment is continuing to rise and salaries continue to rise."
Yes, borrowing costs are on the way up, but it is in the context of an expanding economy, she said.
Despite their enthusiasm, the normally dour central bankers insisted they had not let a little good news go to their heads.
"We're not just forecasters. We're policy-makers. So, for us, it's not just a question of getting the forecast right," said Poloz. "For us to be more cautious than your average forecaster, I think that makes sense."
'Very, very prudent'
Wilkins called the bank's forecasts "very, very prudent."
"We've tried to take account of the uncertainty that's out there," she said. That uncertainty includes trade negotiations with the United States and how that country's own interest policy may unfold.
Our central bankers so far are not predicting a wild boom. But all the talk of headwinds we usually hear from the Bank of Canada was missing this time.
The worst they had to offer were lingering problems in the energy sector, where employment income would take a long time to recover after industry cost-cutting. But that cost-cutting meant the oil and gas business is now able to cope with oil prices in the $40 to $60 US range that the bank foresees.
Despite the loss of the Canadian economy's fossil fuel engine — or maybe because of that loss — the bank is seeing plenty of signs that the wider economy is climbing out of its hole.
Business investment, imports of machinery and equipment, and exports are all showing signs of life.
The bank's latest Business Outlook Survey shows business owners are increasingly optimistic, with sales up and expectations of sales growth even higher. Investment intentions are elevated. Hiring plans are up sharply. And that corresponds with recent employment figures.
A question that our central bankers were unable to resolve was why inflation remains so low. Even the bank's brand new measures of core inflation that are supposed to use statistical methods to look past short-term factors don't see inflation coming.
Perhaps those core measures need to be further refined, because Poloz and Wilkins are convinced inflation really is about to rebound.
The output gap, "the difference between the actual output of the economy and its potential," is going to close around the end of this year, they said, and inflation would hit two per cent next year.
But that will only happen if the economy continues to strengthen.
Even at current levels, said Poloz and Wilkins, interest rates remain exceedingly low — perhaps low enough to draw consumers into risky borrowing, which, if it were to continue, could create financial vulnerabilities.
That means while the main story is economic growth, a small rise in rates will have a dual purpose, gently avoiding a sudden surge in inflation and preventing economic instability.
"Today we can say that there is a reasonable expectation that our inflation will be on target within a year," said Poloz. "And given that base, we can also look at financial vulnerabilities and say, yes, it is appropriate today that interest rates rise for both reasons."
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