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Last week the Bank of Canada (BoC) announced that it would once again hold its overnight rate at 1%, as was universally expected. But in a somewhat surprising move, the Bank significantly altered the language in its accompanying commentary.
Here are the key phrases from the BoC’s latest statement with my comments in italics:
- “The global economy is expanding at a modest rate”, “growth in emerging markets continues to ease”, and U.S. growth was “stronger than forecast” with “gathering momentum in the U.S. economy”. The BoC has been overly optimistic about the strength of the U.S. recovery since the start of the great recession so I would take its U.S. recovery projections with a grain of salt.
- Recent Canadian growth was “stronger than the Bank was projecting” but our economy has not yet rebalanced towards “exports and investment”. In other words, our economic momentum is still overly dependent on consumer spending (and rising household debt levels) but we’re still holding out hope that business investment and higher export demand will grasp the baton.
- “The Bank continues to expect a soft landing in the housing market”. Anyone who has been following the BoC’s forecasts for some time knows that it, like every other central bank, has a surprisingly bad forecasting record. Frankly, it’s hard for me to imagine the BoC forecasting a hard landing for the housing market, so I don’t draw any particular comfort from this observation and I think the media overplayed its significance.
- Despite the fact that the BoC sees business spending recovering “more slowly than anticipated”, the Bank still believes that our economy will gradually “return to full production capacity around the end of 2015.” If the factors that the BoC has been counting on to fuel positive economic momentum are taking longer to develop than anticipated, where is the corresponding positive offset to justify no change in the Bank’s overall view?
- “Inflation is being held down by significant excess supply and by the effects of heightened competition in the retail sector” which has been “more persistent than anticipated”. But not to worry because, without providing any underlying justification, we are still predicting that the economy will return to full capacity by the end of 2015 … which is easier than redoing the forecast and giving everyone a lump of coal in their stocking.
- “Downside risks to inflation appear to be greater”, but overall “the balance of risks remains within the zone articulated in October”. Unspecified “zones” are a forecaster’s best friend.
The BoC’s latest forecast represents a subtle but important shift in its view of what our economic future may hold. The Bank acknowledged that downside-inflation risks are a growing concern without altering its cautiously optimistic overall long-term view.