Sunny no more, Bank of Canada expected to paint economy in darker hues

The key interest rate is unlikely to change, but the central bank will have to explain how it could have been so off

by Julian Beltrame

OTTAWA – Mark Carney has got some explaining to do.

It is no mystery that the Bank of Canada governor will keep the key interest rate moored at one per cent on Wednesday, but some fancy footwork is required to account for how the central bank’s policy team could have been so off about the economy in the past year.

Given the enormous uncertainty in the world, economic forecasters should be prepared to eat some humble pie, says Derek Holt, vice-president of economics with Scotia Capital.

But the Bank of Canada’s forecasts require a double helping.

“I’m of the view that the bank has fairly persistently been too optimistic on growth over its forecast horizon, and not just recently,” he said.

The puts the bank in the position of “having to play the downward revision game for the next year or two.”

In July, the bank missed the sharp slowdown in the third quarter as it was occurring, predicting a solid two per cent expansion despite the undershoot in the first half of the year. The October analysis wasn’t much better, sticking with the growth story — this time 2.5 per cent for the fourth quarter of 2012 — when now it looks 1.5 would have been a stretch.

The bank’s governing council has also underestimated the downward slide of inflation.

On Wednesday, when it releases its winter monetary policy report, the bank will almost certainly “play the downward revision” game, to use Holt’s characterization, not only looking backwards, but likely on its 2.3-per-cent expectation for 2013.

Earlier this month, senior deputy governor Tiff Macklem acknowledged publicly that the economy hasn’t been as strong as the bank anticipated.

Still, on the policy front, many expected Carney to stick to his guns, both in resisting further cuts to interest rates to stimulate the economy, and even in maintaining guidance to markets that the next move, whenever it comes, will bring higher rates.

TD Bank chief economist Craig Alexander says there is justification for dropping that tightening bias, but with Canadians over their heads in debt, Carney is unlikely to signal any weakening of resolve.

“Financial markets have been debating whether the bank could drop the forward looking language… but I still think they’ll leave it in place and the main reason is the bank is still concerned about imbalances in the Canadian economy from consumer debt,” he explained.

Despite the slowdown that has already occurred, Carney could still stay upbeat about the future in anticipation that both the U.S. and China, the world’s two largest economies, appear to be gathering steam, said Doug Porter of BMO Capital Markets.

“I think they’ll recognize the softness we’ve seen, but I think they’ll be more upbeat about what lies ahead.”

Still, Porter notes that the bank will need to make a major revision to come near his own projection of weak 1.7 per cent growth through 2013.

Also of interest Wednesday is that the bank is putting into practice a new format for the interest rate decision and monetary report. In the past, the releases were issued separately over two days, but they are now being telescoped into one announcement. This will push back the announcement on interest rates one hour to 10 a.m. ET.

Observers also expect Carney to face a different mood when he meets journalists later in the morning.

Wednesday is the first opportunity media will have had to question the governor on recent revelations he had been courted by Liberals to take a run at the leadership contest, and had vacationed at Liberal finance critic Scott Brison’s cottage during the summer.

The latter raised questions about whether Carney had breached conflict of interest guidelines in accepting a gift, but the bank ruled the stay was of a personal nature and not part of his duties as governor.




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Sunny no more, Bank of Canada expected to paint economy in darker hues

  1. The global economy is in the dumpster and will remain so until we flatten out the resource distribution. Too few people control far too much of our resources, leading to a situation of underdemand from the working class, and oversupply from the investors.

    Ideally the way we’d handle this is by increasing taxes on the investor class, and using that income for public works or direct transfers to the people who need it. Unfortunately, we currently have a government that is ideologically opposed to both of these actions, and is hoping that simply making money more easily available will solve the problem. Yet all that really does is kick the can down the road for a while. Many consumers will take on more cheaply available debt, so there is a false sense of demand that occurs.

    Of course, this isn’t sustainable because the demand created by debt is short-lived — even if companies react and start hiring people, the additional costs on the debt incurred prevent that level of demand from continuing, which means the companies have to downsize again, and we get another dip.

    So the bank is screwed. They only have interest rates and words to work with. So the only way they can redistribute resources with that is by putting out happy thoughts in the hopes that enough stupid investors will basically blow their money on unsuccessful business ventures that it makes a significant difference as to the resource allocation. It’s a pipe dream, obviously, because not many investors get to be successful by doing stupid things, but it’s all they have so long as we have this government.

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