OTTAWA – Economists aren’t expecting the Bank of Canada to make any sudden moves on interest rates Wednesday or change its neutral stance about future changes, but they’ll be listening closely to what the central bank has to say about weak inflation, which remains below the current trendsetting interest rate of one per cent.
But it may take a doctorate in English to parse the hidden meanings in what’s expected to be a very carefully worded text, said Benjamin Tal, deputy chief economist of CIBC World Markets.
“They will talk about the fact that inflation has been — and that will be the key word — persistently low,” he said.
“They might suggest that it’s because of little competition or some capacity in the market, but they themselves really not sure to what extent this is a sustainable situation or to what extent it’s just noise. And therefore I think that the Bank of Canada will be very, very careful with the language they use about inflation.”
Canada’s inflation rate rose in November to 0.9 per cent, but it was the seventh month in the past 13 where the official headline inflation reading came in below the bank’s desired broad range of between one and three per cent. And it’s been consistently below the ideal target of two per cent, adding further justification to the Bank of Canada’s reluctance to raise interest rates.
Statistics Canada has noted there have been only modest increases on the major goods that Canadians regularly depend on — such as food, energy and shelter.
As for the interest rate announcement, Tal said he’s expecting “absolutely nothing” new.
“I don’t think the Bank of Canada is not going to really try to rock the boat here,” he said. “I think the Bank of Canada is going to be as conservative as possible. They made it very clear that they don’t see interest rates rising any time soon.”
The central bank signalled that last October, when governor Stephen Poloz unexpectedly dropped a tightening bias that had been in place for 18 months, sending the Canadian dollar down. The loonie now stands at 91.15 cents U.S.
But the central bank isn’t losing any sleep over the fact that the dollar is losing ground, Tal said. In fact, it’s a positive for the economy as far as it’s concerned.
“Between the lines you will read a more dovish bank than we have seen a few months ago or under (former governor Mark) Carney, and that’s really the message that the market will be getting,” he said.
The million-dollar question is whether the bank “tweaks” its language to reflect where its concerns lie, said Derek Burleton, deputy chief economist at TD Bank.
Governor Stephen Poloz said recently that he’s very concerned about disinflation in the economy, which is part of the reason why the dollar keeps losing ground, Burleton said.
The bank could stress that it may need to cut interest rates unless inflation rebounds, but it’s unlikely they’d go that far given the concerns about household debt, Burleton said.
“My sense is that there’s not going to be much of a noteable change in the statement,” Burleton said.
“It’s going to be very much a status quo and you know, maybe at the margin, a bit more visible concern about disinflation, which … may lead to some further weakening in the Canadian dollar.”
And it could be a stormy week, with Statistics Canada releasing its December inflation figures on Friday.
There’s good reason to believe that they will rebound, said Burleton, as a low dollar tends to drive up the price of imports.
Benoit Durocher, senior economist at Desjardins Group, said he expects Friday’s report will show that inflation is headed towards the bank’s target.
“The inflation right now is very low and it will stay very low in the coming months,” he said.
“So the Bank of Canada should be worried about that,” he added. “But since we believe that the inflation rate will return within the target very soon, the Bank of Canada should be OK with that and I don’t think that they will mention or tell that they are worried about that situation, which could be interpreted as an intention to lower the interest rate in Canada.”
Durocher said he believes the bank’s forecast for growth at the end of 2013 will be higher than its last report, but will remain unchanged for 2014 and 2015.
Statistics Canada reported Tuesday that manufacturing sales increased 1.0 per cent in November to $50.5 billion, the sixth advance in seven months. The November rise brings sales to their highest level since December 2011, it said.
The increase in November largely reflected gains in the transportation equipment and machinery industries. Sales rose in 11 of 21 industries, representing about 58 per cent of manufacturing.