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WWMCD? Or what would Mark Carney do?


June 22, 2010
by TODD HIRSCH

Todd Hirsch, ATB Financial’s senior economist.

Economists have never been known for speaking with much certainty, although they can’t stop themselves from going on about events and multiplicity of outcomes. It’s no wonder listeners are often left dazed and confused.

That sense of not knowing what’s on economists’ minds is reaching fever pitch this summer.

Bank of Canada Governor Mark Carney recently delivered a speech titled, “Fortune Favours the Bold,” in Charlottetown. Typically the Bank uses these occasions to give the public the inside skinny on what the economists are thinking and what policy the Bank of Canada is likely to pursue over the near term.

This time, market observers were left with little direction, particularly on interest rate trends, but Carney identified the following four expectations in the coming months:

1. The pace, composition, and variability of global growth will be substantially different across economies;

2. The level and volatility of commodity prices will be higher;

3. The nature of the global financial system will be radically altered; and

4. The openness of global markets for goods and capital can no longer be assured.

In a nutshell, he has no idea what’s going to happen next. And it’s not because he’s being cagey or elusive. He is saying that the global economic situation is so volatile and uncertain that there’s no possible way the Bank of Canada can offer any sensible direction as to what they’ll do on July 20, which is the next Fixed Announcement Date for the bank.

This is a marked departure in tone and strategy for Carney who, over his tenure as governor, has made a point of being direct and open about Canadian market conditions. For example, when he and the Governing Council at the Bank decided to chop the overnight interest rate to a mere 0.25% during the Great Recession of 2009, the decision was accompanied with a “conditional commitment” that this rate level would be maintained until mid-2010. That commitment was expressly designed to give the markets some degree of certainty about what to expect.

And the Bank did live up to its commitment (more or less). The overnight rate was held at the crisis-level of 0.25% until June 1, at which point the Bank raised it to 0.5% — the first central bank in the G7 to raise rates. June 1 wasn’t quite the mid-point of the year, but it was fairly close.

Along with the increased rates, the Bank changed its tone in the press release on June 1 and in speeches like the one delivered in Charlottetown. The strategy is no longer providing markets with some guidance, but rather a strategy of preparing them for a high degree of uncertainty.

Carney concluded his speech by urging the G-20 to “reform the global financial system and to secure a sustainable recovery” as well as reaffirming that the Bank’s primary policy goal is low, stable and predictable prices (in other words, 2% inflation).

If global credit markets settle down, if the situation in Greece and Europe improves, and if commodity prices stop swinging so wildly—and that’s a lot of ifs—Carney and the Bank of Canada may continue with a program of removing monetary stimulus from the economy. That is, the overnight interest rate will be increased by another 25 basis points on July 20. But if the drama continues on the global economic stage, all bets are off.

So the question, “What Would Mark Carney Do?” has no easy answer. Not even he can tell what will happen over the next month. All the Bank of Canada knows is that the ride is likely to be a bumpy one.

Todd Hirsch is an Alberta business columnist for Calgary-based Troy Media, and Edmonton-based ATB Financial’s senior economist. E-mail thirsch@atb.com.