Fear of rising rates may have obscured the Bank of Canada's good news story: Don Pittis

Canada's gloomy old central bank governor Stephen Poloz has put on a happy face.

Much of the commentary both before and afteryesterday's quarter-point rate hike the first by the Bank of Canada in seven yearshas been downbeat.

Perhaps influenced by the many who benefit from low rates and the high levels of borrowing it encouraged, much of the media emphasis has beenon the damage a rate hike would cause.

According to that outlook, thathuge load of debt, thealbatross hanging around the necks of over-borrowed Canadians, was only going to get heavier.

But that was not the message fromPolozand his deputy CarolynWilkinsat yesterday's policy-focused news conference.

Good news for Canada

Even the gloomiest questions couldn't bring Polozand Wilkinsdown.

"The most important thing here is that this is good news for Canada,"Poloztold reporters in an uncharacteristicflight of good cheer. "The accumulation of evidence and the growth in our confidence that the economy is on a solid trajectory should be good news for everyone."

That includes people with mortgages.

While he and Wilkinswere careful to hedge their bets with the warning that perfect predictions of the economic future are always uncertain, the tone was almost bubbly.

There is no question consumer interest rates are going up. Within an hourof the Bank of Canada news conference, Royal Bank of Canada had hiked its prime rate by a quarter of a percentage point, automatically pushing up the monthly costs of credit lines and variable-rate mortgages. Other banks quickly followed.

Asked about the impact of rising rates on mortgage holders, Wilkinsinsisted Canadiansmust seeany increase in the context of an "economy where employment is continuing to riseand salaries continue to rise."

Yes, borrowing costs are on the way up, but it is in the context of an expanding economy, she said.

Despite their enthusiasm, the normally dour central bankers insisted they had not let a little good news go to their heads.

"We're not just forecasters. We're policy-makers. So, for us, it's not just a question of getting the forecast right," said Poloz. "For us to be more cautious than your average forecaster, I think that makes sense."

'Very, very prudent'

Wilkins called the bank's forecasts "very, very prudent."

"We've tried to take account of the uncertainty that's out there," she said. Thatuncertainty includestrade negotiations with the United States and how that country's own interest policy may unfold.

Our central bankers so far are not predicting a wild boom. But all the talk of headwinds we usually hear from the Bank of Canada wasmissing this time.

The worst they had to offer were lingering problems in the energy sector, where employment income would take a long time to recover after industry cost-cutting. But that cost-cutting meant the oil and gas business is now able to cope with oil prices in the $40 to $60 US range that the bank foresees.

Despite the loss of the Canadian economy's fossil fuel engine or maybe because of that loss the bank is seeing plenty of signs that the wider economy is climbing out of its hole.

Business investment, imports of machinery and equipment,and exports are all showing signs of life.

The bank's latest Business Outlook Survey shows business owners are increasingly optimistic, with sales up and expectations of sales growth even higher. Investment intentions are elevated. Hiring plans are up sharply. And that corresponds with recent employment figures.

A question that our central bankers wereunable to resolve was why inflation remains so low. Eventhe bank's brand new measures of core inflation that are supposed to use statistical methodsto look past short-term factors don't see inflation coming.

Inflation's rebound

Perhaps those core measures need to be further refined, because Poloz and Wilkinsareconvinced inflation really is about to rebound.

The output gap, "the difference between the actual output of the economy and its potential," is going to close around the end of this year, they said, andinflation would hit two per cent next year.

But that will only happen if the economy continues to strengthen.

Even at current levels, said Poloz and Wilkins, interest rates remain exceedingly low perhaps low enough to draw consumers into risky borrowing, which,if it were to continue, could create financial vulnerabilities.

Thatmeans while the main story is economic growth,a small rise inrates will have a dual purpose, gently avoidinga sudden surge ininflation and preventing economic instability.

"Today we can say that there is a reasonable expectation that our inflationwill be on target within a year," said Poloz. "And given that base, we can also look at financial vulnerabilities and say,yes, it is appropriate today that interest rates rise for both reasons."

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