Before reading Bank of Canada tea leaves, be sure the pot has boiled

OTTAWA — Amid all the hullabaloo over when, not if, the Bank of Canada will continue cranking up the country’s key borrowing level, there is perhaps a lesson for economists, investors and the media alike: Don’t try reading too much into the tea leaves before the pot has boiled.

In fact, the upcoming rate decision — will they go higher (most likely), or will they stay (now less of an option) — has become the only story in town.

And so the bank should be the steel-eyed focus for the country, given the impact that monetary policy makers have on the economy. Negotiations on rewriting the North American Free Trade Agreement can wait, for now. But not too long.

On Wednesday, Governor Stephen Poloz and his monetary policy team will bring down their decision on where to go with the trendsetting interest rate, and bank watchers are overwhelmingly favouring a 25-basis-point hike to 1.25 per cent. A couple more increases are likely on the way for this year.

The U.S. Federal Reserve, as well, is pencilling in a few additional upward movements in lending costs in 2018 — under the new leadership of Jeremy Powell, appointed by President Donald Trump, who will soon be taking over the reigns with the departure of chair Janet Yellen.

The Trump presidency makes economic forecasts more iffy than in previous years.

Even so, both Canada and the U.S. are coming off strong economic growth in 2017, and both are likely to see a moderation in the pace of expansion this year as rates edge higher and gross domestic output settles into a similar pace.

This much we know.

But there are always outliers in the forecasting game — how better to grab the attention of readers and investors? Still, only rarely do these analysts attract a big crowd. That’s because they are, more often than not, slightly off the forecasting grid.

This was the case last week when some economists, such as David Rosenberg, chief economist at Gluskin Sheff + Associates, who criticized his Bay Street counterparts by saying “rarely” had he seen “such lopsided and hyperbolic responses to a piece of economic data before as much as the December employment report.”

“I wouldn’t even call what I’ve read analysis, as much as one part reporting and one part cheerleading. Let’s hope there’s a bit more more of a deep dive into the data going on at the Bank of Canada before any decisions are made on Jan. 17.”

Rosenberg was referring to the report that 78,600 jobs were created last month, pushing the unemployment rate down to a decades-low reading of 5.7 per cent.

The response was immediate.

Douglas Porter, chief economist at BMO Capital Markets, said: “Umm, ‘cheerleading’? Really?”

“Canada leads G7 in growth last year, 400,000 net new jobs, lowest jobless rates in over 40 years and record auto sales. Not cheerleading, but reality,” Porter said. “Suggesting otherwise is denying the obvious.”

Still, there is no doubt, the fate of NAFTA remains “a key risk for the Mexican and Canadian outlook for 2018.”

“But, as we have long asserted, it is ultimately a manageable risk, and one that cannot freeze policy and should not freeze business decisions,” Porter said. “Even amid the dizzying array of conflicting headlines, the reality is that the labour market is tightening rapidly and financial conditions are highly stimulative in the here and now. And it is that reality that is likely to drive the Bank of Canada’s rate decision.”

Craig Alexander, chief economist at the Conference Board of Canada, said “if we look since the last (BoC) meeting, the economic news for Canada has been remarkably positive. The job creation numbers in December were stellar.”

The markets have factored in an 80 per cent chance of a rate increase on Wednesday. “And I do think one is coming,” Alexander said. 

Special to Financial Post

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