Mark Carney, Governor of the Bank of Canada, today spoke on Canada’s response to the financial crisis. In a question and answer period after the speech, Mr Carney said (via Reuters):
Our view is that the first line of defense of financial stability is regulation and we would underscore the experience with Canada, Australia, other major inflation targeters has been that you can have your cake and eat it too — you can have price stability, you can have financial stability if you get the regulatory side right.
As the governor of the central bank in the only country in the G7 that avoided bailing out its banks, Mr Carney has good reason to tout his country’s success. But what if the crisis has yet to pass?
From a speech by Mark Carney, Governor of the Bank of Canada
I am reminded of a story told to me by Jean-Claude Trichet, President of the European Central Bank. A mutual colleague, at the start of the crisis, was visiting a small village in the Scottish highlands. He was bereft of his BlackBerry and was anxious for the latest financial news. He entered a newsagent and asked for the Financial Times.
- The shopkeeper said, “Would you like yesterday’s paper or today’s?”
- Given the weight of events, he answered without hesitation, “I would prefer today’s.”
- To which the shopkeeper replied, “Then come back tomorrow.”
In today’s world, policy-makers cannot wait until tomorrow. They must act immediately. To do so effectively, they need guiding principles.
Household debt continued to contract last quarter, falling at an annual rate of 1.25 per cent according to the Federal Reserve’s flow of funds data released today. It’s the seventh consecutive quarterly decline, but its slowest since the fourth quarter of 2008. As has been the case, the falls have been split between home mortgage debt, which fell at an annual rate of 0.75 per cent, significantly slower than the last two quarters, and credit card debt, which fell at 5.75 per cent, significantly faster.
So does this mean that US consumers are buckling down and, despite job losses and declining household wealth, paying down their credit cards?
Probably not, according to a recent credit card debt study from Card Hub. (h/t Felix Salmon)
If ever there was a night to give fodder to critics of central bank politicisation, it was last evening.
South Korea maintained its interest rate at 2 per cent, after pressure from the government on outgoing central bank president Lee Seong-tae.
Then the Argentine Senate failed to achieve quorum today to debate the appointment of the new president of the Bank of Argentina.
Action Economics said in a research note that it expected the Bank of Canada to begin increasing its main interest rate in July as the labour market continued to recover.
The general uptrend in hiring since last August will leave an upbeat outlook for Canada’s job market and broader economy that underpins expectations for BoC tightening to start in July.
We expect the BoC to hike rates 25 bps in July. The March announcement began to build the case for rate hikes in the second half of this year as the Bank is projected to move rates from currently extraordinary accommodative levels to merely accommodative levels. At the same time, the prominent role of monetary policy in the recovery and continued downside risks to growth and inflation back the maintenance of an 0.25% floor through Q2 of 2010 and a measured approach to second half tightening.
Action Economics predictions on Canadian tightening:
Fiscal woes are here to stay. Decades of discipline on public finances will be needed to bring eurozone public sector debt back within the European Union’s rules, the European Central Bank has warned.
As if determined to keep up the pressure on governments, the ECB latest monthly bulletin sets out scenarios for the debt-to-GDP ratio, according to appetites for cutting spending and/or raising taxes. Only on the boldest scenario, in which the “primary balance” (excluding interest payments) improves by one percentage point of GDP a year until 2018, does the ratio return below the 60 per cent limit within two decades. If no consolidation efforts are made, the ratio rises from 84 per cent this year to 150 per cent by 2026. Its assumptions may prove wrong, the ECB concludes, but the results “illustrate the increased risks to fiscal sustainability in the euro area”.
Gloomy stuff, but there could be some quick wins.