The Canadian economy is quickly going from a recovery to overstimulated. That was the take from the National Bank of Canada (NBC) today, anyway. In an unusual move, the Big Six bank wrote an open letter demanding a halt to stimulus. They also argue that the central bank needs to hike rates in the next few weeks or risk undermining the recovery.
Canada No Longer Needs Extraordinary Stimulus
The Big Six bank argues the central bank is indulging in cheap and reckless growth that’s no longer needed. Most key indicators show the economy is well into a recovery. Some indicators are even better than pre-pandemic, but monetary policy is still loose. The risk has officially gone from deflation to inflation from easy monetary policy.
“Let us be blunt: Having achieved full employment, Canada no longer requires extraordinarily stimulative monetary policy,” wrote the bank. Adding, “… maintaining such a loose policy standing much longer risks compromising Canada’s longer-term economic and financial market prospects…”
The Bank of Canada Should Stop Stimulus and Halt Rates
The BoC isn’t just keeping rates low; they’re also still delivering billions in stimulus to the economy. The BoC has hinted they’ll halt stimulus in the next few months. Sometime between April and September 2022, they see a rate hike. That’s too late, says the Big Six, who thinks the central bank doesn’t appreciate reality.
The economists are calling on the BoC to use its final meeting this year to set expectations. The last meeting of the year is coming up next Wednesday. Squandering this opportunity can lead to adding even more risk into the system.
“Use Wednesday’s rate announcement to telegraph a possible normalization of monetary policy in the first quarter of the New Year, implementing the first of multiple interest rate hikes no later than March,” they wrote.
Employment and Housing Are Becoming Overstimulated
The BoC has been helping set expectations, just in the other direction. If you’ve been following the data, you might have noticed that’s not the case. The head of the central bank even began to dismiss the reliability of their own research at some point. Not because they find it unreliable or anything. There’s no conflicting research — it appears it’s solely due to it not agreeing with the Governor’s narrative. His narrative is a muddled take that even he fails to communicate effectively.
“The national unemployment [rate] back down to 6% — a level that would have been considered at or perhaps below NAIRU in pre-COVID days, as per Bank of Canada published research,” highlight’s the economists.
For those not fluent in bankster, NAIRU is short for the non-accelerating inflation rate of unemployment. It’s the level of employment before the job market becomes so tight that it drives wages higher. BMO also recently pointed out the last time Canada hiked rates, unemployment was at this level. That occurred in 2017, when the overnight rate was also significantly higher.
Not convinced employment is overheated? How about housing? “You may prefer to look past our notoriously choppy jobs data. Perhaps you go in for housing data. Well then, you’re likely reading about a reacceleration in activity and downright steamy price gains in key markets,” wrote the economists.
The Canadian real estate discussion focuses mainly on supply but rarely demand. Arguably, BoC rolled out policies to help stimulate home buying when they thought sales would fall. Sales didn’t fall. After a year of record home sales, they’re only ending one program to ease demand.
The program only ended last month, and has yet to see trickle down to consumers. BMO estimates excess home sales hit 6% of GDP due to monetary stimulus. That’s just the extra home sales — with the biggest beneficiary being investors.
Central banks lower rates and use stimulus to create demand. If the demand rises to the point of driving inflation, they’re supposed to raise rates to throttle credit. “For a Canadian economy proving so resilient, with jobs so plentiful and inflation so elevated, the time is nigh for demand to be calmed,” said the bank.