In maintaining its target for the bank rate at 0.50 percent, the Bank of Canada holds onto the hope for a better tomorrow. But it makes no bones about it's real concern when it states that the “uncertainty about the global outlook is undiminished, particularly with respect to policies in the United States”. Canadians, simply, are very nervous about the incoming U.S. president’s protectionist policies and its implications for a global economy that is far from robust.

Granted that commodity prices have improved over the last six months and growth has steadied, the Bank remains cautious on its outlook for Canada. Excess capacity continues to dog many industries. And, while employment has firmed up, somewhat, there is clearly considerable slack in the labour market. The Canadian economy has a long way to go before fully recovering from the 2008 financial crisis and the oil price shock of 2014. In particular, the Bank was quick to note that there has been a negative wealth and income effect from the oil price collapse that still lingers some three years later and may well continue much longer.

Unlike the U.S. Federal Reserve, the Bank of Canada has only one mandate and that is maintain price stability, hence its focus solely on the conditions that affect consumer prices. The Bank notes that:

“Inflation in Canada has been lower than anticipated since October Monetary Policy Report (MPR), mainly because of declines in food prices. Measures of core inflation are below 2 per cent, reflecting material excess capacity in the economy. As consumer energy prices rise and the impact of lower food prices dissipates, inflation is expected to move close to the 2 per cent target”.

The Bank’s statement raises two very important concerns.

First, the Canadian dollar “has strengthened along with the US dollar against other currencies, exacerbating ongoing competitiveness challenges and muting the outlook for exports”. The anticipated recovery of the non-export sector has been one of the major planks of the Bank’s outlook. The recovery of non-resource exports continues to fall short of expectations. Clearly, the Canadian dollar needs to fall further if there is any hope of a revival in manufacturing exports.

Secondly, the Bank  notes that “ the rapid back-up in global bond yields, partly reflecting market anticipation of US fiscal expansion, has pulled up Canadian yields relative to the October Monetary Policy Report (MPR).” The central bank does not like to comment on the shape of the yield curve, since it is mostly a reflection of market conditions that it cannot directly affect. But, judging by this statement, the Bank is not happy that Canadian long term rates were swept up in the exuberance of the Trump victory. Canadian inflation and economic conditions, per se, do not warrant a steepening yield curve. Inflation in Canada has been lower than was expected when the Bank released its October MPR and core inflation continues to be below the 2 per cent threshold. The Bank continues to adhere to its hope that the rate will move close to the 2 per cent rate in the “months ahead and remain there throughout the projection horizon while excess capacity is being absorbed”.  

In sum, the Bank of Canada concedes that there is no expectation that a reduction in the bank rate will do anything to combat low inflation and excess capacity. In a word, “hope “is all it can rely now.