Bank of Canada Governor Mark Carney delivered a speech to the Toronto CFA Society on Wednesday where he discussed the guidance of central bank policies and how the market is responding to his various interest rate hike warnings.
After speaking to CFA Society members, Carney held a press conference where he spoke to reporters regarding the size of the federal government, potential lessons that could be used in his future Bank of England duties and his legacy that he will leave behind and what his successor must do.
The Parliamentary Budget Office (PBO) published a report Tuesday that found taxpayers paid the average full-time federal government employee a salary of $114,100 in 2011-2012. It concluded that wage payments exceeded that in the private sector and Canada’s consumer price index.
Carney first noted that he has not yet read the PBO report, but explained that the central bank does track wage settlements throughout the country and found that public sector wage settlements have not been exorbitant in aggregation.
“Once you combine wage settlements with both public sector and relatively modest growth in the private sector, that’s one of the factors which is a moderating pressure on inflation in Canada, despite the relatively strong employment outlooks,” stated Carney. “When you look at it in a whole, that’s not what is actually seen in aggregate in the macro-statistics.
Both Carney and Finance Minister Jim Flaherty have warned about the growing household debt. One of his latest warnings came in November when he told the Senate banking committee that the levels of household debt-to -income are elevated at approximately 163 percent.
At the time of his remarks last month, Carney said that many Canadians feel they are wealthy because their assets are worth more than their debts.
“We’ve seen it over and over and over again, most recently in the United States, where people get sucked into a balance sheet analysis that says, ‘I’m very wealthy because my assets are worth more than my debts,’” explained Carney. “But they are illiquid and they can’t service their debts because they lose their jobs or interest rates go up or both. And that causes the default.”
Carney iterated the same sentiment Tuesday to reporters. Although an interest rate increase isn’t expected prior to the end of 2013, there could be targeted monetary policy initiatives, such as increasing rates to tackle the growing household debt issue and the growing housing market, including the overbuilding of condominiums.
“Just the simple math of it is that the third quarter was slightly slower. It would be slightly larger, but this on margin,” Carney told the media at the Sheraton Centre in downtown Toronto. “That said, the momentum is somewhat softer as we signaled in our December rate decision, and recent data is consistent with a bit more softness that is there.”
He did list a number of positive statistics and trends in Canada’s economy, including the pace of household debt accumulation slowing down and slight adjustments in the resale market.
Lessons for the Bank of England
Last month, the Ministry of Finance and the Bank of Canada announced that the central bank head will be stepping down as of July 1 in order to take the top job at the Bank of England. Carney will be taking the reins from Sir Mervyn King.
When asked what lessons he will take to the Bank of England, Carney noted that he has to be very careful when commenting on the British central bank and its monetary policies. He did reiterate the important aspects of transparency as guidance.
“There are experiences of crisis management that we had here in Canada – we didn’t have bank failures and we didn’t have other issues – in part we didn’t have those because we made tough decisions in a timely fashion, we are transparent upfront about the scale of issues,” said Carney.
Maintaining monetary policy transparency and having a developed plan that will be executed are important aspects that the central bank governor espoused throughout his time at the Bank of Canada.
“Tim Geithner always says ‘a plan beats no plan’ and I believe that is absolutely right. Someone has to make a decision and take control and we played a role in that,” stated Carney, who noted that the central bank had a tremendous amount of coordination amongst the major authorities and institutions, such as the financial institution, the bank regulator and the treasury.
“One of the strengths of the Bank of Canada is in the in-depth of talent in the institution,” added Carney. “As a governor, you listen to diverse points of view and synthesizing within that institutional structure, either a path for monetary policy or a path of financial reform. Those are some of the aspects that worked here in Canada.”
Carney’s successor has yet to be selected. The Board of Directors will soon create a Special Committee to undertake a recruitment process for the next Bank of Canada governor, who is then appointed by the independent directors and approved by the minister of finance and the federal cabinet.
He did not say what the next Bank of Canada governor should do.
“Legacies are determined by others and not by yourself,” said Carney. “What would be entirely wrong is to manage policy to my horizons as opposed to the right horizons to have, the optimal policy horizons. We’re not going to try to cram a bunch of decisions into the next six months.”