David McKay, chief executive of Royal Bank of Canada, the country s largest lender and second biggest company by market capitalization after Shopify Inc. thinks we are on the verge of an epic shopping spree. Please apologize, but this video has failed to load the content.
Where can I see videos from our team? If RBC CEO is right about impending spending spree, interest rates will rise sooner than anticipated Tiff Macklem, the Bank of Canada Governor, concèdes that possibility, but thinks it's more likely a shell-shocked nation will use most of its excess cash to pay off debt. His outlook is one of the reasons the central bank doubled down on its pledge to leave the benchmark lending rate at 0.25 per cent until at least the second half of 2022, as inflation still escaped the comfort zone of the Bank of Canada this summer. Macklem and his peers at other central banks see inflation mostly as a one-off. Pandemic-related supply disruptions are being caused by additional supply disruptions. Elevated unemployment rates, among other indicators, suggest that the economy has plenty of room to grow before it begins testing its ability to generate non-inflationary growth. There is significant excess supply in the economy, he said on a conference call with reporters on Oct. 7. That capacity is closing up. Statistics Canada s capacity utilization rate, which measures the extent to which industry is maximizing its production capability, was 82 per cent in the second quarter less than 84.3 per cent two year earlier, but more about the same as it was at the beginning of 2020. The unemployment rate was 6.9 per cent in September, compared with pre-pandemic levels of around 5.5 per cent. But the crux of the debate is whether a crisis we are different from any other human being has ever experienced has altered our propensity to spend. Households had savings of $208 billion in the first quarter, compared with $27.9 billion in the second quarter of 2019, according to Statistics Canada data. Bankers in Canada and the United States doubt North Americans lose their taste for conspicuous consumption. Much of the Household Savings glut represents money that is just sitting there waiting to be spent, McKay told a virtual audience assembled on 13 October 2013 by the Institute of International Finance.
The debate between central bankers and CEOs is how fast does it get spent and where does it get spend, he concluded. Most central banks think it s going to be a decade and that it s largely going to go to pay back debt first. Corporate CEOs think it s going to be consumed and, therefore, create demand. The balance between those two worlds, I think, is one of the biggest drivers of where you come out on inflation argument and the economic growth rate. McKay s comments complicate the ability of the Bank of Canada to control the narrative, key to managing expectations about what prices are heading. Coffee-counter chatter about the price of lumber can be ignored and ideologically-tinged rants about how monetary policy is debasing the currency can be explained away. Expressions of doubt represent a different level of criticism from the head of the country's biggest financial institution. The central bank will need a convincing story when it next updates its economic outlook on Oct. 27; that, or concede that McKay is right and change course entirely.
Macklem remains with his position that inflation is transitory. Asked about McKay's comments, the governor reiterated that price pressures will recede as soon as suppliers and logistics companies work through an unusual array of disruptions ranging from drought to port congestion. According to a TV reporter, there is a fair amount of ingenuity in the business community, he told reporters Oct. 14. They have in the past found ways to process these. The Bank of Canada isn t concerned that its policies will unleash more demand than the economy can handle. Its quarterly survey of consumer sentiment suggest that households are less keen to splurge on stuff they don t really need. Blockchain, AI, the Internet of Things will change banking industry, RBC CEO says.
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The central bank's first post-pandemic outlook predicted that very little of Canadians excess savings would find its way into the economy by consumption. Policy-makers later adjusted that view in July, predicting that 20 per cent of savings would be spent on buying goods and services, while the rest would be used to repay debt, purchase homes and invest. Macklem said another revision is possible when they crunch the numbers for the next outlook. What households have been telling us is they will continue to spend a lot of it, but they are going to save part of it, he said. We will continue to revise and amend those estimates in line with what we hear. A downward revision on spending could force the Bank of Canada to raise interest rates sooner than planned. The federal bank s current guidance is that it won t lift the benchmark rate before the second half of the next year, even though inflation has soared to four per cent, twice Macklem's target. That is a weird stance if inflation pressures are coming from inflationary issue. Higher interest rates won t help ports unload ships any faster, nor will they bring rain to parched fields or speed up the production of computer chips. If evidence starts to show that we were as materialistic as we were before pandemic, it might be a good idea to factor higher interest rates into your spending plans.