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Stephen Poloz’s dashboard: Why the Bank of Canada will keep interest rates low for longer, but not lower

Stephen Poloz’s dashboard: Why the Bank of Canada will keep interest rates low for longer, but not lower
Business
Many of Bank of Canada Governor Stephen Poloz’s favourite economic indicators suggest he should stay the course into 2020.

A year ago, we built a “dashboard” of the numbers that the Canadian central bank cares about most. The idea was to add texture to the weekly reporting of high-frequency data by pushing beyond the headlines, just like policy makers do. The post-crisis economy doesn’t behave like it did before the Great Recession. Analysis based on superficial readings quite likely will be wrong.

We retained a few of the most popular figures, such as the monthly jobless rate, but opted against incorporating most of them, including the Consumer Price Index, since inflation figures can be easily found at the Bank of Canada’s website. Our dashboard is an assembly of the nontraditional indicators that various Bank of Canada officials have flagged as significant in recent years. It’s not comprehensive, but it’s the richest display of Canadian economic data that won’t cost you hundreds of dollars a month.

The dashboard was flashing warning signs as summer turned to autumn. Hiring was strong and wages were turning in the right direction. But business investment plunged in the second quarter, and exports were weak amid an escalation of the trade war between the United States and China. Almost every major central bank was cutting interest rates and it looked like the Bank of Canada would follow.

But it didn’t, and that now looks like justifiable decision.

Full employment is forcing employers to offer higher wages to get the workers they need. The number of active jobseekers without work for a year or more is back at average levels, as a strong labour market pulls stranded workers from the sidelines. There are problems in Alberta and Saskatchewan, but Canada’s diversified economy is adjusting to the troubles in the oil industry.

Business investment in machinery and equipment recovered somewhat in the third quarter, pushing spending to an adequate, if unspectacular, level. An important engine for economic growth sputtered, but it didn’t stall.

Adequate investment probably is the best anyone should expect given the trade wars. Exports remain weak; international sales of services, which have been a source of strength as shipments of merchandise slumped, were little changed in the third quarter, and non-energy exports dropped in September. These numbers argue for leaving interest rates unchanged, and perhaps even lowering them.

But the interest-rate cuts that many economists thought were imminent don’t appear necessary at the moment. Credit growth has reaccelerated, which will force policy makers to consider financial stability in their deliberations over the months ahead. They can err on the side of caution and leave borrowing costs unchanged because domestic consumption recovered in the third quarter after stalling over the summer.
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