Carney and the likely path of inflation and interest rates

I find the notion that we are transitioning to a significantly higher interest rate regime a little unconvincing for several reasons.

First, the appreciation of the CDN dollar should have a deflationary effects. To the extent that increasing interest rates in Canada will provoke a higher FX (assuming the US remains stuck in a liquidity trap alongside a moribund political discourse surrounding budget deficits and thus near zero interest rates) there will be a 2 for 1 punch against inflationary pressures.

Second, there are several indications that China is moving towards a tighter monetary regime.

Third, the world is awash in excess capacity with the European and American consumers on the sidelines. How do you get inflation in a world where everyone is trying to either export or austere themselves back to economic health?

Fourth, on the subject of unions, workers and wage growth, there is not going to be significant wage-push component inflation in the near to medium term. The public sector (understood in its broadest sense) is being hammered; and workers in the private sector have little collective bargaining power. All of this is in the context of slack labour markets: neither bodes well for rapid consumption growth nor inflation.

So, where Carney conjures his present of near to medium-term inflation bogeyman from I do not know.

I should also say I have material reasons to WANT to believe we are headed into a higher inflation / higher interest rate regime as the performance of my pension fund depends on it. But unlike my union executive I won’t be engaging in magical thinking.

It should also be said that, at least, Carney acknowledged that growth was going to be much less robust than the Conservatives have budgeted on. That said, it makes the commitment not to commit to low rates rather odd.

It could be that Carney is trying to jaw-down the property market (bubble?). Throwing uncertainty into the likely future path of interest rates is an important part of altering home-buyer confidence.

Or it could be that Carney knows his models are junk, at this time, and his gut tells him that this is an extremely difficult market to call so he his battening-down the hatches and leaving the widest range of policy options on the table.

For further analysis see Erin Weir”s post over at the PEF

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