Governor Carney's future political career looking good

The Bank of Canada raised interest rates again this week, and Governor Mark Carney’s decision seems to have gone over just fine. Whew. As promoters of his role in even higher office, it is important that his prospects for a future political career remain pristine.

This lack of fallout is no small feat, given the editorial opposition of papers such as the Toronto Star, who advised that “higher interest rates would have a double whammy effect on the Canadian economy: by raising the cost of consumer and business credit, they would dampen domestic demand, and by driving up the value of the Canadian dollar.”

Ontario Premier Dalton McGuinty also sent a shot at Ottawa, advising against interest rate hikes, even though the economic recovery had “taken hold”. Easy to say, of course. Which voter wants to pay more for anything?

We’re known to be fans of Governor Carney (see prior post “The subtext of the new Bank Governor’s appointment” Oct 12-07 and “Commercial bank loans drop just $60 million in October” Nov 28-09), so it might seem predictable that we are coming to his defence on this point.

Let’s start with some facts. With the 0.25% increase this week, banks have pushed their prime rates to 3% across the board. Although the prime rate drives the borrowing costs of a medical practice line of credit, or your personal floating rate loan, most companies that we come across have LIBOR as their base rate. Which is barely above zero percent right now.

Even if The Star were right, and every Canadian business borrowed on a prime-based formula, the absolute borrowing cost of their bank facilities is still at modern day lows. Borrowing from your commercial bank at 3.5 or 4 per cent, as compared to the 6-8% range that most businesses would normally see, seems like a bargain to me.

In the U.S., absolute corporate debt rates are so low that US$51 billion of new bonds and leveraged loans were issued over a two day period earlier this week, according to the WSJ. With U.S. 3 month LIBOR holding at 0.293%, is it any wonder that corporations are raising cheap, long term capital? Whether or not they spend it is another matter, but that’s got little to do with what the overnight rate is pegged at.

The companies and consumers that are borrowing from their banks are paying little for the honour to do so. That may well explain why consumers have added 61% to their Line of Credit balances over the past three years, as we’ve highlighted in the past (see prior post “Personal credit line balances up 61% since 2007” July 26-10).

If I’m not mistaken, former Federal Reserve Chair Allan Greenspan has been blamed for setting the stage for the meltdown in the U.S. housing industry. His mistake? Keeping rates too low for too long, as I recall.

Ironic, isn’t it?

Mr. Carney knows what we know. It is still very inexpensive to borrow funds. Learn from Mr. Greenspan’s experience. That makes for a good central banker.

In the absence of any negative immediate fallout from Mr. Carney’s rate hike, his sober stewardship at the BoC continues to serve as a fabulous springboard to Parliament Hill. The Star, which admires political bravery and leadership, will hopefully trust his judgment on this one.

MRM