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Why Stephen Poloz isn’t ready just yet to pivot on interest rates

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Normally, we’d preview the Bank of Canada’s next policy decision closer to the actual date. But all the relevant data has been published, so why wait? Unless the central bank scraps its story, it will leave the benchmark rate at 1.25 per cent on May 30.

Canada’s dollar dropped half a cent against its U.S. counterpart on Friday, probably because new readings on inflation and retail sales suggest the economy is chugging along, not racing ahead at a pace that would alarm policy makers. The prices of financial assets linked to short-term interest rates put odds of an interest-rate increase next week at about 25 per cent.

Bank of Canada Governor Stephen Poloz and his lieutenants on the Governing Council will take note of those prices. When Poloz abandoned explicit forward guidance, he said he hoped investors would think harder about the economy and spend less time trying to guess what he might be thinking. The market’s current message: There’s no need to change policy.

The sudden wobble in the renegotiation of the North American Free Trade Agreement might also have influenced traders. Policy makers have characterized uncertainty about trade policy as the biggest headwind facing the economy because it’s a chill on investment. So the shift to a protracted negotiation, after politicians spent several weeks suggesting a deal was close, is a negative.

But trade never was going to play a major role in the May decision. The vibe around NAFTA was turning positive a month ago, and the Bank of Canada opted to leave the benchmark rate unchanged. Officials said they would stop worrying about trade only when they saw evidence that business investment was holding up. RBC Capital Markets said last week that its monitoring of company announcements suggests a modest increase in spending. Still, definitive data won’t be available until after May 30: Statistics Canada will release its tally of second-quarter gross domestic product the following day, and the central bank’s quarterly Business Outlook Survey is due on June 29.

That’s why the policy announcement scheduled for July 11 is the earliest the Bank of Canada could raise interest rates and remain consistent with what it’s said about how it would react to trade news, positive or otherwise. To move in May would require a noticeable change in other economic variables and that hasn’t happened.

To be sure, oil prices are about $15 a barrel higher than central bank’s current forecast, which is based on prices a month ago.

That will prompt some debate over the next 10 days as policy makers deliberate over where the economy is headed. Normally, a shift of that magnitude would represent a material change in Canada’s prospects. Yet there has been no discernible change in the value of the currency, the TSX or the outlook for economic growth, according to economists at Bank of Montreal. Higher crude prices mean the value of exports is rising, but those gains are being offset by doubts about whether the increase will last and the future competitiveness of Canada’s high-cost oil industry.

One indicator that would outweigh concerns about business investment is inflation. The Bank of Canada’s primary mission is to keep the consumer price index advancing at an annual rate of about 2 per cent. Statistics Canada reported the CPI increased 2.2 per cent in April from a year earlier, the third-consecutive month that inflation exceeded the central bank’s target. That’s noteworthy because annual price increases had brushed the target only three times in the previous three years.

The upward pressure on inflation could make the May decision a closer call than currency traders seem to think. The Bank of Canada cares more about three specially crafted inflation gauges than it does the headline number, which is often distorted by surges and plunges in energy and prices. Two of those three measures now are above 2 per cent, and the third is at 1.9 per cent, so for the first time since early 2012 all four of the key price indicators have been at target or higher. Sebastien Lavoie, a former staffer at the BoC who now is chief economist at Laurentian Bank Securities in Montreal, calculated that prices for 24 of the items in StatCan’s CPI basket were increasing at a rate faster than 3 per cent in the first quarter, compared with 22 that did so in 2017. The number of items that were cheaper declined to 30 from 34. The change suggests inflation is heating up, if only gradually.

“We still think it is preferable for [Bank of Canada] officials to remain on the sidelines at the May 30 monetary policy decision meeting,” Lavoie said in a note to his clients. “This being said, this decision is likely to be a close call given that two of the three core inflation measures are now above the 2% target.”

The two other factors that dominate the Bank of Canada’s narrative about the economy are household debt and Poloz’s contention that lower interest rates might actually help policymakers stay ahead of inflation.

Household debt is about 100 per cent of GDP, compared to about 70 per cent in 2005, according to the International Monetary Fund’s new Global Debt Database. All that debt probably means consumers are more sensitive to changes in interest rates than they were in the past. So the BoC is looking for evidence that credit growth is slowing, but not so fast that it crushes domestic demand. And as you might expect, higher interest rates appear to be restraining consumer demand. StatsCan said last week that retail sales jumped 0.6 per cent in March from the previous month, but only because of a surge in automobile purchases. Most other retail segments are essentially unchanged from January 2017.

Sluggish retail sales support Poloz’s argument that Canada’s economy isn’t as strong as its 5.8-per-cent jobless rate suggests. He sees elevated rates of long-term and youth unemployment as marks of the financial crisis and the oil-price collapse. Higher interest rates risk killing growth that could pull more of those people into the labour market and Poloz has been crystal clear that he intends to do what he can to encourage that to happen.

“In some models of the economy, that would become a permanent thing, a hysteresis thing,” Poloz said of the elevated number of marginalized workers, while talking to me and a couple of other journalists in Washington last month. “Well, if it can happen in one direction, there is no reason with enough time that it can’t be reversed because it’s just people combined with new investment, just building more economic building blocks.”

He added: “You’ve got to believe we’re going to get a fair bit of that. But again I can’t guess how much, but I think it’s a really important phase.”

It will take some strong evidence to push Poloz off that course and there hasn’t been enough since then to force a pivot. Bottom line: low for a bit longer.

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India’s VIP culture: Forget Lincoln’s definition of democracy. India’s government is of VIPs, by VIPs and for VIPs

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Last week, the Madras high court ordered the National Highways Authority of India to separate ordinary citizens from VIPs at toll gates, with a dedicated lane for the latter. Of course, high court judges are included in the list of VIPs. The court held it to be ‘disheartening’ and ‘very unfortunate’ that judges are ‘compelled to wait in the toll plaza for 10 to 15 minutes’.

NHAI decided to challenge the directive. One might have expected the judges to be rather more concerned that more than a million cases have been pending in 24 high courts across India for over a decade. According to CJI Dipak Misra, the total backlog of cases at all levels of the judiciary is a staggering 33 million! The impact of this delay should weigh a bit more heavily in the minds of the learned judges while they leave matters of administration in the hands of the executive branch of government.

Uday Deb

What is telling about the directive is the VIP mentality that has become part of the DNA of India’s ruling elite. Contrary to Abraham Lincoln’s famous definition of democracy, India has a government of VIPs, by VIPs and for VIPs. They do what they can, the people suffer what they must. In the heyday of European empires, colonial masters ruled imperiously over conquered subjects. During the Raj, the British class system fused seamlessly with India’s caste system to entrench social divisions even more rigidly.

After independence, India proudly declared itself a sovereign democratic republic and added the word ‘socialist’ in the Constitution. The central tenet of the four words taken together – sovereign, democratic, socialist, republic – is the sovereignty of the people. Politicians and officials are their servants. But as in other self-described socialist and communist paradises, India’s ruling elites captured all the privileges while the disempowered populace was saddled with poverty, scarcity and general misery.

The elite moved into the newly-vacated opulent bungalows of Lutyens’ New Delhi, even as the growing mass of destitute citizens lived in slums that sprang up along the city’s outskirts. Gradually political office became the fastest route to miraculous wealth acquisition and conspicuous consumption. In time the brazenness of privileged behaviour spread to an all-encompassing sense of entitlement as the political and bureaucratic elite, in that order, began to act like feudal overlords over citizens.

The more that the quality of public services (health, education, infrastructure) decayed and institutions were degraded and corrupted, the greater was the distance between the lifestyle of the closed circle of the elite and ordinary citizens. Inevitably this morphed into the VIP culture that Indians by and large detest with a depth of contempt, anger and resentment that is difficult for foreigners to fathom.

The Congress party bears particular responsibility for this sorry state of affairs as the party of government in New Delhi and most states after independence. One of the great attractions of Prime Minister Narendra Modi’s election winning slogan of good governance in 2014 was it promised to restore the rightful balance in relations between citizens, officials and politicians. ‘Twas not to be. In this as in most other respects, the gap between boastful rhetoric and actual practice remains distressingly wide: the 56-inch chest has been overshadowed by a 96-inch tongue.

Modi has tried to lead by example in some respects and is not in the least bit ostentatious himself. Nor has he given any indication so far of abusing his office for private gain or mistreating citizens. But this was the defence that his predecessor Manmohan Singh adopted without success: that the sea of corruption in which so many of his ministers were drowning was no indictment of his performance, for he himself was squeaky clean.

Similarly, although Modi himself has not been seduced by the VIP culture, he has failed to assert himself against those from within his and allied parties who have very publicly abused their offices. Perhaps he did learn the trick of bathing with a raincoat from Dr Saheb after all.

An obvious display of VIP culture that strikes foreign visitors is the list, in full public display at airports, of more than 30 categories of VIPs exempt from pre-boarding security screening. And how else other than a deeply instilled VIP culture do we explain Shiv Sena’s MP Ravindra Gaikwad’s air rage last year when he boasted he’d used his slippers to hit a 60-year old Air India staffer 25 times?

In a civilised country Gaikwad would have been expelled from the party, charged with assault and lost his seat. The party would have moved quickly to apologise to the attendant and the people and promised that such appallingly thuggish behaviour is neither condoned by nor acceptable to the party. But not in India’s corrupted political culture. Instead, Shiv Sena threatened to disrupt air travel. The Centre capitulated to this mobster-like blackmail and ordered Air India to take Gaikwad off the no-fly-list. Throughout the highly publicised episode, Modi’s silence was as eloquent as his predecessor’s on maha-scandals.

Compare this to a notorious incident in Pakistan – supposedly a less robust democracy – where on 15 September 2014, former interior minister Rehman Malik held up a plane for two hours. When he finally boarded, angry passengers harangued him and refused to let the plane take off until he had been thrown off. A passenger uploaded a video of the incident to YouTube. Two weeks later he was sacked from his unrelated job but not before his video was widely shared and praised by a public sick to death of Pakistan’s VIP culture.

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Priyanka Gandhi’s entry into UP politics has sent political opponents into tizzy

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Conventional political wisdom, in the absence of credible caste Census data, classifies 52 per cent of the state’s population as ‘Backward Classes’, 18 per cent as Dalits, 5 per cent each of Brahmins and Thakurs and Muslims as 17 per cent of the people. Smaller castes and sub castes are said to constitute the remaining three per cent.

The caste cauldron of eastern Uttar Pradesh has witnessed Kurmis float the ‘Apna Dal’ and the Rajbhars forming the Bharat Samaj Party. Boatmen and fishermen in eastern UP also are clamouring for better representation in politics. They will want their pound of flesh and bargain hard for seats. The small parties have small pockets of influence but are said to be important. Some say they are more important in 2019 than they were in 2014. Can they win half a dozen seats on their own or play the spoiler and, if so, for whom?

Eastern Uttar Pradesh took an active part in the freedom struggle and has been a hot bed of politics for long. With the passage of time, people have become politically aware and have responded to leaders like Ram Manohar Lohia and Chaudhary Charan Singh in the past.

“But as you can imagine, this is a snakepit,” quips a regional Congress leader. “It is going to be an uphill task for Priyanka Ji. She has very little time, less than two months, before the general election and it would certainly require a Herculean effort on her part,” he quips.

But that she means business became evident in less than 48 hours of her arrival in Lucknow, when she, flanked by the general secretary in charge of western UP Jyotiraditya Scindia and Keshav Deo Maurya of Mahan Dal, announced a poll alliance with the small party active in western UP.

“I welcome Keshav Maurya ji. We will fight the elections jointly. Rahul ji has given us the task of creating a political atmosphere in which everyone is taken along and all sections of the society are represented,” Priyanka said. “We will contest with full might,” she asserted.

Predictably, the Bharatiya Janata Party, which desperately wants to ensure that it does not lose too many of the 71 constituencies it won in 2014, has reacted with disdain in public. But its growing concern at Priyanka Gandhi Vadra catching eyeballs, time and space in the media, especially Television, is manifest in even casual conversations.

“Television has been Modi Ji’s turf and we have milked it for the past five years and more. But suddenly TV channels are devoting considerable time following Priyanka Gandhi Vadra and discussing the impact she may have,” admitted an old BJP hand. While the BJP has largely bought media space, he grudgingly conceded that the Congress was receiving ‘ free publicity’ ever since it was announced that Priyanka Gandhi Vadra would formally hold charge of eastern UP.

The party is divided on how to counter the threat posed by her. While knives are clearly being sharpened to launch vicious attacks as and when she starts moving out and address public meetings, there are doubts that the move might boomerang and fail to yield much political dividend.

Ignoring her is another option that has been discussed, confide BJP insiders. But the thinking is to evolve a strategy as and when she slips. BJP leaders believe that while she possibly has a better command over Hindi, she eventually may not prove to be much of an orator.

“Election rallies require rousing speeches, sharp barbs, an ability to get the crowd to laugh and rage – and there is no match for Narendra Modi,” says a BJP leader with satisfaction, convinced that Priyanka Gandhi Vadra is far too polished to make much of a difference on public platforms.

Another BJP strategy is to belittle her experience and performance in the pocket boroughs of the Congress in Amethi and Rae Bareli. “How many Assembly seats could she win for the Congress,” is what BJP workers have been advised to ask in public in an attempt to play down her impact.

But the worry shows and notwithstanding their stance in public, on Monday Chief Minister Yogi Adityanath abandoned a review meeting with district magistrates to huddle with senior party leaders following the six-hour road show in Lucknow by Priyanka Gandhi Vadra.

Says Alok Kumar Rai of the Faculty of Management Studies at BHU (Varanasi), “The strategy of playing down Priyanka Gandhi may actually have the opposite effect.” The attack on the dynasty, say observers, is stale and weak and the other approach, of saying that Priyanka Gandhi Vadra has been inducted to cover up the failure of her brother, may actually enhance her public stature.

By all reckoning, Priyanka Gandhi Vadra’s entry into UP politics seems to have upset all political applecarts, at least for now. Keshav Dev Maurya of Mahan Dal (right), a small party in western Uttar Pradesh, announced on Wednesday that it would contest the election in alliance with the Indian National Congress. He is seen in this picture with Jyotiradiya Scindia ( left) and Priyanka Gandhi Vadra

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Partners again: Pragmatic compulsions push BJP into making up with estranged ally Shiv Sena

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The seat sharing deal between BJP and Shiv Sena ends over four years of public bickering between old allies, stemming from BJP’s unwillingness to settle for junior partner status in the 2014 Maharashtra assembly polls. Both parties fought separately and BJP came on top winning 122 seats against Shiv Sena’s 63. Later, Sena joined the state government but its resentment at not being the dominant partner showed, as it continued hurling barbs at BJP.

Sena’s barbs would have hurt BJP more than the opposition’s because both parties’ bases overlap significantly. Yet both needed each other and this kept the alliance in place. The seat sharing deal with Sena is an acknowledgment by BJP that the downside risks of fighting Lok Sabha elections without its ally-cum-foe are too forbidding to ignore. A similar situation forced BJP to part with 17 seats for JD(U) in Bihar. In making peace with former critics like Uddhav Thackeray and Bihar chief minister Nitish Kumar, BJP appears to have concluded that 2019 is too close to call.

Anti-incumbency and the newfound resolve among opposition parties to prevent division of their vote could be behind BJP’s mellowing, as it shores up alliances through generous seat sharing arrangements. In Maharashtra, Congress and NCP are reviving their alliance and reportedly wooing smaller parties led by Prakash Ambedkar, Raju Shetti and Raj Thackeray. Recall that the Congress-NCP alliance won three successive assembly elections before being felled by the Modi wave of 2014. BJP may rue the surrender of gains it made vis-a-vis the Sena in Maharashtra but coalition arithmetic demands such sacrifices.

In the 1990s it was BJP that propped up Nitish after his split with Lalu Prasad. The investment paid handsome dividends when the JD(U)-BJP coalition stormed to power in Bihar in 2005. In 2017, when JD(U) was again on a weak wicket, BJP played a masterstroke to woo it back. As a result, NDA may fare better in Bihar after the lashing in the 2015 assembly polls. BJP president Amit Shah had preferred a maximalist approach to politics earlier, but that is taking a backseat now due to pragmatic compulsions. Recall that the north-east was also won through alliances. Both BJP and Shiv Sena have an opportunity to put the past behind them. But selling the alliance to voters after Sena’s incessant criticism will be a tricky proposition.

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