Expect anger as Poloz pulls the punch bowl: Don Pittis

StephenPolozhas swiped the punch bowl and, just like at a real party, some Canadians deprived of theirmeans of staying happy are going to switch from flying high tofurious.

If that sounds dated, I should make it clear it is by no meansa freshanalogy.

The reference comes from 1955, when the U.S. Federal Reserve's sternest and arguably most competent, boss, William McChesney Martin, described the Fed chair's hardest job, raising interest rates after a period of stimulative cutting.

A chaperone's duty

At such a moment the central banker"isin the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up," Martin famously said in a speech to investment bankers.

In the summer of 2013, when Stephen Poloztook over for the departing Mark Carney,thenew Bank of Canada governor was destined for the role of"party pooper."

• StephenPolozwill be an economic partypooper

Nobody likes to make enemies, but even if he is doing exactly thething a chaperoneshould, there are very good reasons for a lot of Canadians to be angry with the governor.

There are profound differencesbetween the effects of cutting interest rates and the effects of raising them.

Cutting ratesmakes money cheaper. It makes stock markets go up as investors borrow to speculate. Falling rates make bonds rise in value.

Falling rates makeit easier to get a mortgage and makethat mortgage easier to pay off. Low rates make the price of your house rise as everyone piles into the market, stimulating the construction and real estate industries.

Low rates stimulate exports by keeping the loonie lower than it would otherwise be.

Partying up a storm

And in economic terms, Canadians have beenpartying up a storm. The economy has been growing at an annual rate of 4.5 per cent, a point and a half faster than inthe U.S.

The unemploymentrate hoversat the lowest levels in nine years.

Canadians may be partying like it's 2006, but whenthe Bank of Canada intervened to cut rates after the 2008 collapse and again when oil prices tumbled by more than half in 2015, no one promised rates would stay low forever.

As the Fed's Martin predicted more than 60 years ago, once low rates had done their job, it was the painful and essential duty of central bankers to prevent inflation byincreasing those rates again. And he didn't expect people to like it.

"Inthe field of monetary and credit policy, precautionary action to prevent inflationary excesses is bound to have some onerous effects if it did not, it would be ineffective and futile," said Martin.

Those "onerous effects"are exactly the opposite of the pleasurable oneslistedabove.

Higher rates make money more expensive. Theydrive down the price of existing bonds. They can pull down stock prices.

Feeling poorer

As we've already seen, higher rates make mortgages dearer and harder to obtain, especially for young people just putting their foot on the real estate ladder.Fallingreal estate prices can make you feel poorer still, even if your house is paid off.

Higher rates pushup the value of the Canadian dollar, making exports more expensive in foreign markets.

"Those who have the task of making such policydon'texpect you to applaud," Martin told his audience of bankers.

Someeconomists may beapplauding yesterday's rate increase, butPolozmust also expect a chorus of boos.

Among the angriest will be the one-third of Canadians who, as we heard this week, already feel overwhelmed by their debts.

For people with home equity loans, ahalf-point increase ininterestrates in onlytwo months canraise eachmonthly loan paymentby more than 10per cent. Variable-rate mortgage payments will rise by a similar amount.

For those living paycheque to paycheque, where will that money come from?

• Almost half Canadian employees livepaydayto payday

There will be winners. But the over-borrowed are not the only ones who will feel squeezed, especially if, as markets are now predicting, there are more rate hikes to come.

Expect anger from investors, the real estate industry, construction and exporters. Expect business concerns about the rising cost of capital. Expect protests that the increase was not needed and statements about howcentral banks cause recessions. Expect complaintsthatthe bank has interferedin markets, even though fewcomplained when they interfered to push rates down.

Steering through the rearview mirror

And Polozcannot be sure he has done the right thing.The future remains unknowable, and there are many potential external crises from NAFTA failure to a new Korean warthat could bring the Canadian economy crashingdown again.Polozmust steerby looking in the rearview mirror.

Taking the punch bowl away does not make you a lot of friends. But for a responsible central bank, it is an essential part of keeping an economy sound.

And as William McChesneyMartin said so long ago, the complaining would be worse if the central bankers waited too long.

"If we fail to apply the brakes sufficiently and in time, of course, we shall go over the cliff."

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