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

0


[ad_1]

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

Content of the article

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.

Advertising

Content of the article

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. “

Advertising

Content of the article

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.

Advertising

Content of the article

“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.

Advertising

Content of the article

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.

  1. Dave McKay, President and CEO of Royal Bank of Canada, speaks at the company's annual general meeting in Toronto on April 6, 2017.

    Blockchain, AI and Internet of Things will change banking, says RBC CEO

  2. To varying degrees, Norway's economic trends match those of advanced economies.

    The end of super cheap money? Central banks begin tightening cycle

  3. Markets took in two Bank of Canada rate hikes in a year, according to swap exchanges.

    BoC should let inflation soar and keep interest rates low, Teachers chief economist says

Advertising

Content of the article

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

Advertising

comments

Postmedia is committed to maintaining a lively but civil discussion forum and encourages all readers to share their views on our articles. Comments may take up to an hour of moderation before appearing on the site. We ask that you keep your comments relevant and respectful. We have enabled email notifications. You will now receive an email if you receive a reply to your comment, if there is an update to a comment thread that you follow, or if a user that you follow comments. Visit our Community rules for more information and details on how to adjust your E-mail The settings.


[ad_2]

Leave A Reply

Your email address will not be published.