If RBC CEO Is Right About Looming Spending Frenzy, Interest Rates Will Rise Sooner Than Expected



Kevin Carmichael: David McKay’s comments complicate Bank of Canada’s ability to control narrative

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How will you spend your savings from the pandemic? Think carefully. The answer should shed light on the path of interest rates, but the two most important figures in Canadian finance disagree on how you will react.


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David McKay, Managing Director of Royal Bank of Canada, the nation’s largest lender and the second-largest company by market capitalization after Shopify Inc., thinks we’re on the verge of a shopping epic.

Tiff Macklem, the governor of the Bank of Canada, admits the possibility, but thinks it is more likely that a country in shock will use most of its excess liquidity to save, invest and pay off debts. Its outlook is one of the reasons the central bank doubled its pledge to leave the benchmark policy rate at 0.25% until at least the second half of 2022, even as inflation slipped out of the zone. comfort from the Bank of Canada this summer.

Macklem and his peers at other central banks view inflation as largely one-time due to supply disruptions linked to the pandemic. High unemployment rates, among other indicators, suggest that the economy has a lot of leeway to grow before it begins to test its ability to generate non-inflationary growth. “There is still a considerable oversupply in the economy,” he said. said on a conference call with journalists on October 7. “There is the capacity to meet that demand. “


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This ability is closing. Statistics Canada’s capacity utilization rate, which measures the extent to which the industry is maximizing its production capacity, was 82 percent in the second trimester , lower than 84.3% two years earlier, but about the same as at the start of 2020. The unemployment rate was 6.9% in September, compared to levels of around 5.5% before the pandemic.

But the crux of the debate is whether a crisis we’ve never experienced has changed our propensity to spend. Households had $ 208 billion in savings in the second quarter, up from $ 17.9 billion in the second quarter of 2019, according to Statistics Canada data.

Bankers in Canada and the United States doubt that North Americans have lost the taste for conspicuous consumption. Much of the household savings glut is money “waiting to be spent,” McKay told a virtual audience assembled by the Institute of International Finance on October 13.


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“The debate between central bankers and CEOs is how quickly it is spent and where is it spent,” he continued. “Most central bankers think it’s going to take a decade and a lot of it is going to pay off the debt first. Company CEOs believe it will be consumed and therefore create demand. The balance between these two worlds, I think, is one of the main drivers of the inflation and (economic) growth rate argument.

McKay’s comments complicate the Bank of Canada’s ability to control the narrative, key to managing expectations about price direction. The coffee-counter chatter about the price of lumber can be explained, and the ideologically-tinged rants about how monetary policy depreciates the currency can be ignored. The expressions of doubt from the head of the country’s largest financial institution represent another level of criticism. The central bank will need a compelling story in its next economic outlook update on October 27; that, or admit McKay is right and completely change course.


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For now, Macklem is sticking to his position that inflation is transient. Asked about McKay’s comments, the governor reiterated that pricing pressures will ease as suppliers and logistics companies face an unusual array of disruptions ranging from port congestion to drought. “There is a fair amount of ingenuity in the business world,” he told reporters on October 14. “They have in the past found ways to overcome them.”

The Bank of Canada is not too concerned that its policies are releasing more demand than the economy can support. Its quarterly consumer sentiment surveys suggest households are less inclined to splurge on things they don’t really need.

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The central bank’s first post-pandemic outlook predicted that very little of Canadians’ excess savings would end up in the economy through consumption. Policymakers then adjusted this view somewhat in July, predicting that 20% of the savings would be spent on buying goods and services, while the rest would be used to pay down debt, buy homes and invest. Macklem said another review is possible once they calculate the numbers for the next outlook.

“What (households) have told us is that they will continue to save a lot of it, but they are going to spend some of it,” he said. “We will continue to revise these estimates in line with what we hear. “

An upward revision in spending could force the Bank of Canada to raise interest rates sooner than expected. The central bank’s current stance is that it will not hike the benchmark rate until the second half of next year, even though inflation has climbed to 4%, double Macklem’s target.

It is a reasonable position if inflationary pressures stem from strange supply problems. Higher interest rates won’t help ports offload ships faster, nor will they bring rain to parched fields or speed up production of computer chips. But they would dampen demand.

If the evidence starts to show we’re as materialistic as we were before the pandemic, it might be a good idea to factor higher interest rates into your spending plans.

• Email: [email protected] | Twitter: carmichaelkevin



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