E The Bank Of Canada Continues To Hold Its Breath

The announcement this morning that the Bank of Canada is holding its trendsetting interest rate at 0.5 per cent comes with considerable caution, almost trepidation. There seems to be more emphasis on “uncertainties” than in the past pronouncements, as the Bank struggles with the lack of visibility on the external side of the economy.

To begin with, although the CPI ticked up in January to 2.1 per cent, the Bank was quick to point out that this is related to a spike in energy costs due, in large measure, to the introduction of a carbon tax in Ontario.The Bank is looking beyond these effects and has rightly concluded their impact on inflation will be temporary. All the Bank’s three measures of core inflation continue “to point to material excess capacity in the economy.”The Bank sets monetary policy in relation to resource utilization, rather than to a specific inflation target. For the American readers, this approach should be compared to that adopted by the Federal Reserve which seems so heavily focused on hitting an inflation target.

The Bank did express some satisfaction that the data so far are consistent with its recent projections on growth. The uncertainties start with the export sector which faces competition, especially in the non-energy sector. Canada continues to fight just to maintain external market shares. Turning to the domestic side, the Bank freely acknowledges that wages and hours work are  stagnating, providing further evidence that the  economy cannot tolerate any rate increase.

The Bank is ever mindful of current bond yields which it considers to be elevated given the weakness in business investment. Statistics Canada just released its survey of investment intentions which shows that the private sector is paring back on capital expenditures. The planned cutbacks are not only related to the slump in the oil sector but also to reductions in manufacturing in 13 of its 18 subsectors. The slump in manufacturing is especially troubling, since this is the sector that is supposed to take advantage of the Canadian dollar’s devaluation.