Bank of Canada speech – headline vs. reality

Globe and Mail: Interest rate trajectory will depend heavily on housing market, Bank of Canada deputy governor says

Bank of Canada: The perfect storm

Quite the difference!

Read the speech itself, and THEN the Globe and Mail article – by reading the news article first, you expose your brain to potentially getting swept away into some narrative which may or may not be a reflection of the intended communication.

Going to the speech:

As a result, we expect the recent increase in commodity prices to boost the level of business investment in Canada by less than half of what our models generally predict based on historical relationships.

All in all, the commodity price shock is expected to generate a modest positive impact on the growth outlook for Canada—smaller than we have seen in the past.

The Bank of Canada is surprised that commodity companies are contributing less in capital investment despite the price environment. I wonder why!

More importantly, a slowdown in growth does not have to mean high unemployment, which was the hallmark of the stagflation period of the 1970s. Right now, job vacancies are very high, which means employers are trying to hire still more workers from a declining pool of labour. By cooling overall demand, we can reduce the demand for labour and the degree of labour shortages in the economy. Employers could stop looking for new workers but keep the ones they have—with little impact on the unemployment rate. That is a scenario that delivers a soft landing.

Good luck! This is like the macroeconomic equivalent of trying to thread a needle while wearing heavy-duty construction gloves.

First, what might lead us to pause our policy rate increases as the rate enters our estimated range for neutral of 2% to 3%?

Now we will get to what caused the Globe and Mail headline to print:

Another factor that might lead us to pause is that many households have taken on more debt to get into the housing market. At the end of 2021, the household debt-to-income ratio was 186%, above the pre-pandemic level of 181%. And rising interest rates are designed to slow the economy by making borrowing more expensive. That tends to slow sectors like housing. But this slowing might be amplified this time around because highly indebted households will face high debt-servicing costs and will likely reduce household spending more than they would have otherwise. Our base-case scenario includes a slowdown in housing activity. But we could see a larger-than-expected slowdown due to higher indebtedness and unsustainably high housing prices.

There were a whole bunch of reasons rates will level off at the “neutral rate”, and reasons why rates would continue to rise, but the Globe and Mail cherry-picked this paragraph for their desired headline.

I’ll leave it up to you to digest the rest of it. The important signal of this speech is that we will see central banks give out this “Well, there is going to be a limit to rate hikes” mantra which will attempt to stop what has been a slow motion stock market crash in recent months. The Federal Reserve is likely to follow suit with their forward guidance (‘speeches’).