Canada

Canada Sure Seems to Be Betting on a Global Recovery

The central bank is expected to tighten credit, a vote of confidence in the U.S. economic expansion and the world's.

Canada's central banker has reason to smile.

Photographer: Photographer: Patrick Doyle/Bloomberg

The world's fastest-growing major developed economy is expected to get an interest-rate increase as soon as this week.

The Bank of Canada is likely to pull the trigger and increase its benchmark rate, the first such move in seven years. Economists have penciled in a further step by year-end.

While it would mean higher borrowing costs for a housing industry showing signs of strain, that's a good problem to have. A rising rate in Canada is a vote of confidence in U.S. expansion and, by extension, the newfound optimism that the world economy is poised for an upswing.

Canadian customers are the biggest buyers of American exports. The bulk of Canada's oil exports go to the U.S. No other major industrialized economy is as reliant on the U.S. economy, accounting for about three-quarters of what Canada sells abroad.

Bank of Canada Governor Stephen Poloz is well aware of his country's links to the broader world through the U.S. Prior to leading the central bank, he ran Export Development Canada, the business-development agency equivalent to the Export-Import Bank in the U.S. He has co-written academic papers on global supply chains.

Poloz took great heart from the International Monetary Fund's last update on the global economic outlook. After years of downgrades to its forecast, the IMF raised its growth projection to 3.5 percent this year and 3.6 percent in 2018. Modest increases for sure, but it's the direction that's important.

And things are humming at home. Gross domestic product grew 3.3 percent in April from a year earlier. The central bank's latest quarterly Business Outlook Survey found executives expect growth will be sustained. The Business Outlook Survey also included the highest-ever score for intentions to hire.

So confident are traders that Poloz will deliver a rate increase -- market estimates put the chances at 90 percent -- that the only thing up for grabs is whether this is the start of a cycle of rate increases, or just a one-off, or perhaps the first in a two-off.

The Bank of Canada cut rates twice in 2015 in an effort to contain the damage from a slump in energy investment. So is this likely step just an effort to eradicate 2015 from the slate or something more? In addition to Wednesday's statement, Poloz will hold a press conference to explain the bank's thinking.

The Bank of Canada's action certainly says something about the domestic scene, but just as importantly it's a vote of confidence in the world beyond Canada's borders.

(The photograph with a previous version of this article showed the wrong bank in Canada.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Daniel Moss at dmoss@bloomberg.net

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    Philip Gray at philipgray@bloomberg.net

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