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Just in time for Hallowe’en comes a scary surprise:

The nation’s gross domestic product unexpectedly contracted in August, Statistics Canada reported Wednesday, after a flat reading in July.
…
If the economy fails to expand in September, third-quarter annualized growth would be on pace for a sub-2 percent increase, after a gain of 4.5 percent in the second quarter. The Bank of Canada projects growth of 1.8 percent in the third quarter. Economists surveyed by Bloomberg News forecast an average 2.1 percent expansion in the second half.

The nation’s currency dropped as much as 0.6 percent to C$1.2915 against the U.S. dollar after Tuesday’s report, which may fuel concern the Bank of Canada’s caution about raising interest rates will only deepen.

On the other hand, the most recent BoC governor worthy of respect thinks policy should tighten anyway:

David Dodge, who led the Canadian central bank between 2001 and 2008, thinks Poloz should focus more on the long-neglected issue of financial stability and take the opportunity to raise rates now that the economy is running more or less at potential. Poloz kept his benchmark rate at 1 percent last week and indicated he’s in no rush to tighten, given that he still sees signs of wage and inflation slack.

Keeping borrowing costs low will only encourage households and businesses to keep adding debt, risks that should factor in more to the central bank’s decision making, Dodge said in a telephone interview.

“While I understand why they want to be cautious, and I think that’s quite correct, the fact that they are not moving to deal with what is a problem in financial markets arising from this very long period of very low interest rates I think is a mistake,” Dodge said.

Interest rates could rise by a full percentage point and still remain well below the 3 percent the Bank of Canada estimates is “neutral” for the economy — neither stimulative or contractionary.

“It’s not like the bank is being unreasonable,” said Dodge. “Their’s would be more or less the mainstream view, whereas I put a little bit more emphasis” on financial system distortions. “I’ve lived through earlier periods,” he said, in reference to the financial crisis.

This entry was posted on Tuesday, October 31st, 2017 at 8:32 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.