OTTAWA: Canadians burdened by large mortgages and record consumer debt-to-income ratios can likely breathe a sigh of relief this week as they wait to see whether the Bank of Canada raises rates again. Of course, following the last rate hike that came as a bolt from the blue, one can never be sure. And while most of the recent data tells us the Canadian economy has gone off the kind of boil that would make rate hikes mandatory, there is at least one statistic that indicates the central bank’s long-term prediction of higher inflation is still on track. “Inflation models for sure are not broken,” Bank of Canada governor Stephen Poloz said in Washington last weekend. So far the bank’s data shows the economy still has room to grow without bidding up the available supply of labour and capital. That difference between current growth and the economy’s capacity is called the output gap.
In fact, Poloz said, rather than closing that gap, the Canadian economy seems to be expanding its capacity by doing things like educating more young people and improving public and private infrastructure. “It’s good because it’s the sweet part of the cycle,” the governor said. “It’s where you’re actually creating new capacity, which is permanent, so it’s a very positive thing.” According to the Bank of Canada’s survey of business sentiment released last week, the Canadian economy is not too hot and not too cold. That’s sometimes referred to as a Goldilocks economy, taking its name from the children’s story where a little girl tastes all the bowls of porridge until she finds the one that’s just right.
