Business cycle dating committee recession
David Dodge, who led the Canadian central bank between 20, 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 per cent 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 per cent 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.
In his twice-annual testimony to lawmakers Tuesday, Poloz reiterated that the central bank will be cautious in making future changes to interest rates.That could be a good thing if it means companies are financing investments.Since corporate borrowing is rising faster than investment, however, it may suggest instead that companies are taking on debt to fund share buybacks or higher dividends, Dodge said.The Committee also does not utilize a fixed definition of economic activity; rather, it examines and compares the behavior of various measures of broad activity and may also consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve's index of industrial production.The Committee acknowledges that use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures.