I believe it was U.S. President, Harry Truman, who once said he was tired of hearing from “two-handed-economists”. It seems that at the Bank of Canada two-handed economists continue to hold sway. Not unexpectedly, the Bank of Canada announced that it will hold its policy rate at 1.25 per cent. The Bank cited several factors that, on the one hand, are positive and several factors that, on the other hand, are restraining the economy. To be fair, these are not easy times for central bankers as they try to steer a course for interest rates at a time when economic uncertainty has rarely been greater. So, it is understandable why the Bank is so cautious about rate changes in the future.

On the one hand, the Bank looks to Canadian exports to strengthen in response to what they believe will be continued growth in the international markets. On the other hand, exports will not recover, sufficiently, the ground lost during the second half of 2017. Oil exports are constrained by transportation bottlenecks within Canada and also because of large price discounts on non-conventional oil. Canada continues to run trade deficits which are expected to keep economic growth in check.

On the one hand, the Bank is somewhat buoyed by a steady increase in business capital investment, as borne out from its recent survey. This should add to capacity in key sectors and in the economy more generally. Canada lost nearly 10 per cent of its industrial capacity in the recession of 2008-9 and has been slowly recovering. On the other hand, the growth in capital formation is held back by “ongoing competitiveness challenges and uncertainty surrounding U.S. trade policies”. The Governor in his press conference noted that the “export/investment nexus” is what is hindering economic growth.

On the one hand, Bank believes the country is approaching its 2 per cent inflation target, as excess capacity is take up, signaling the possible need for higher interest rates. On the other, the volatility in energy prices and recent increases in minimum wages “will likely cause inflation in 2018 to be modestly higher … than the 2 per cent target…”. In other words, the Bank is prepared to breach the 2 per cent target, in recognition of these temporary conditions.

On the one hand, the Bank considers the outlook for the global economy to remain positive “with upward revisions to growth and potential output in a number of major advanced economies… the outlook for the U.S. economy has been further boosted by new government spending plans. ‘’ On the other hand, the Bank remains very concerned about the “escalating geopolitical and trade conflicts risk undermining the global expansion.”

Housing remains the one area in which the Bank expresses some trepidation going forward. The introduction of new mortgage guidelines in late 2017 have already hit the Toronto and Vancouver markets, as sales and prices have dropped off dramatically. Hiking rates in response to developments in other sectors of the economy, only serve to worsen the housing situation and with that exacerbate household debt ratios.

The Bank has concluded that the economy cannot be sustained on its own without continued monetary accommodation. Rates must remain at these current levels.