A former chief executive of one of Canada’s biggest banks says monetary policy has run "too loose for too long" in this country, and cites the housing market as a prime example.
Pressure has been building on the Bank of Canada to raise its benchmark interest rate as inflation runs hot and as concerns mount over runaway home prices. But Ed Clark, one-time CEO of Toronto-Dominion Bank (TSX:TD) and current chair of artificial intelligence research firm Vector Institute, said the central bank is in a tough spot when it comes to adjusting monetary policy upward.
"We’ve had a tremendous fiscal response [to the COVID-19 pandemic] but we’ve also then continued to have very low interest rates. I think that’s distortive. I mean, you can just see what’s happened to housing prices – it’s incredible," Clark said in an interview on Friday. "And it’s the same in the capital markets – you suppress spreads, so poor credits can borrow at almost the same rates as good credits.
"I think we’ve got ourselves in a dilemma that we’ve run monetary policy too loose for too long."
Nonetheless, Clark said the central bank needs to be careful about raising rates considering the integrated nature of the global financial system and the impact it would have on our currency.
"The problem for the Bank of Canada is if it starts to run what I would call more sensible monetary policy - if it gets too far out of line, then you’re going to have the dollar go up dramatically and make our exports less competitive. So they have a much harder game to play," he said.
As of Friday afternoon, market data indicated investors have priced in six rate hikes this year, which would bring the Bank of Canada’s benchmark rate to 1.75% – and would represent a more aggressive hiking timeline compared to what’s expected from the U.S. Fed and European Central Bank.
