Canadian GDP in the third quarter advanced at a more anemic pace than that of the previous quarter. Growth amounted to an annualized rate of 0.6 percent and a decline in exports to the US amongst other trading partners weighed heavily on growth. As business investment as well fell off in the quarter, it looks as if the Canadian economy has paused from a Sunday stroll to take a breath.
Part of the decline in exports may be attributed to an appreciating currency and its direct impact on the price of our goods we sell in foreign markets. However, with that in mind and the impact interest announcements have on the nominal exchange rate, there has been an ongoing perception in the financial press and with our central bank themselves that the next interest rate move will be to increase the overnight rate. In the writers opinion, that day is still a long way off.
Central bankers and policy makers see our consumer or household debt levels at very vulnerable levels. In the latest Quarterly Monetary Policy Report from the Bank of Canada, Governor Mark Carney continued to issue his warning that the Canadian household sector remains the biggest risk to our domestic economy. And although raising interest rates is a way to raise the cost of credit to cut some of the marginalized borrowers, it is not the role of Canada’s central bank to blindly target asset bubbles.
In order for the Bank of Canada to raise interest rates, we need to see two changes occur. First, the rate of inflation would need to modestly accelerate. This translates to prices along with wages increasing in a growth environment that allows a central bank to effectively raise interest rates in order to create stability in the price level.
Second, our interest rate policy would have to act accordingly to our neighbor’s to the south. As the US continues down a path of experimental monetary policy which acts to suppress both long and short term rates, a rate hike from our central bank would make our dollar even more popular to outside investors for its potential return. And as the US has pledged to hold rates low until at least the end of 2014, it’s difficult to fathom how our key lending rate could divert from that of the US.
In order to contain household and consumer debt levels, we would be more likely to see policy action from our federal government (who have acted on four separate occasions since 2008 in order to rein in tighter mortgage regulations) than see an interest rate hike from our central bank. This is simply due to the fact that countries continue to pursue expansionary monetary policy to see at best what has been lackluster growth.
Regardless of being in a period of a combination of uncharted monetary and fiscal policy, history can still be applied. It was the rationale of the famous economist Paul Samuelson whom explains when real interest rates, being inflation less the nominal interest rate, fall below 2 percent real assets will attract capital. That may be applied to the housing market, and gold for that matter. There is a plethora of reasoning behind why central banks will not be raising interest rates in the imminent future; anemic growth is only one. That being said, governments can impose and have imposed regulation to cool the housing market.
What about gold?