Mark Carney will almost certainly leave his benchmark interest rate alone Tuesday, citing the nagging question marks that hang over the global recovery even as the rebound in the crucial U.S. market looks to be gathering steam.
The real news from the Bank of Canada this week will come in the latest version of a comprehensive forecast that Mr. Carney and his governing council publish four times a year, scheduled for release Wednesday, with a sneak preview flagging the biggest changes on Tuesday in their decision on borrowing costs.
The legion of investors and economists who make a living trying to predict the course of monetary policy are waiting anxiously to see how much of a kick Mr. Carney believes the all-important U.S. economy could get from the tax-cut package President Barack Obama and Republicans in Congress agreed to late last year and, consequently, how much and how soon Canada's economy might benefit.
They're also on alert for hints about whether headwinds from overseas - Europe's debt woes, measures taken by emerging markets such as China to keep their economies from overheating, or increasingly aggressive efforts by countries like Brazil to devalue their currencies as a wave of foreign capital rushes in - are weighing more or less heavily on the governor's mind.
Mr. Carney and his deputies will have analyzed and debated all of those developing stories, and considered anecdotal evidence from their quarterly surveys of Canadian business executives, to determine whether to accept or tweak forecasts produced by the central bank's hundreds of analysts using more than 20 sophisticated models.
That last step is key, economists say, since the importance of weighing staff forecasts against the decades of experience and judgment around the table cannot be underestimated in light of the failure of the Bank of Canada and most private-sector forecasters to see the global downturn coming 2½ years ago.
"Even the most sophisticated economic models in the world, and the bank certainly has some very sophisticated models, struggle at turning points in the economy," said Doug Porter, deputy chief economist at BMO Nesbitt Burns and a member of the C.D. Howe Institute's Monetary Policy Council. "You can probably get almost to within pinpoint accuracy when things are relatively calm and smooth, but they often miss the big turns and, at the end of the day, that's what really matters."
There is an active push within the central bank to improve the institution's economic models to factor in variables whose importance was put into sharp relief by the crisis and its aftermath. For instance, trying to quantify the likely economic effects of new capital and liquidity requirements for banks, or what could happen to the financial sector and the wider economy should households' debt levels keep growing.
But all the state-of-the-art modelling in the world is only so useful when conditions are changing as rapidly as they were in July of 2008, when Mr. Carney famously predicted that economic growth would pick up through the rest of the year, quickening in 2009 and into 2010. Instead, the economy was in recession by the end of 2008, and wasn't growing again until late 2009.
Of course, it's far more important that Mr. Carney and other central bankers acted quickly and boldly to mitigate the crisis, arguably preventing a worldwide depression. Nonetheless, it's worth remembering the fallibility of policy makers and the economic models they use and to take the Bank of Canada's new forecasts with a grain of salt.
For example, last July, Mr. Carney predicted the Canadian economy, while slowing down after a scorching first quarter of 2010, would still expand at a healthy 2.8-per-cent annual pace from that month through September. By October, when his next forecast came out, Mr. Carney was estimating growth of just 1.6 per cent for the July-through-September period. When Statistics Canada's figures on the quarter came out at the end of November, the agency said growth had come in at a troublingly anemic rate of just 1 per cent.
Just as policy makers were thrown for a loop by the North American recovery's sharp slowdown last summer, this week's forecasts may suggest Mr. Carney and his officials are now being pleasantly surprised in the other direction.
That won't necessarily be enough to push Mr. Carney back off of the sidelines for at least another couple of months, not least because of forks in the road that he'll list as potential obstacles to the trajectory he lays out in his forecast. The inherent uncertainty these days means that even those who believe Mr. Carney could afford to raise his benchmark rate from 1 per cent to 1.25 per cent Tuesday aren't 100 per cent sure if that would be the smartest move.
"Six weeks ago, if we had been talking about how the U.S. economy was looking, we would have been considerably more negative than we are today," Chris Ragan, a McGill University economics professor who leads the C.D. Howe council's research on monetary policy. "But six weeks is an incredibly short period of time."
Indeed, Stephen Gordon, an economics professor at Laval University in Quebec City who has studied the science behind forecasting, said it's important for anyone using the central bank's forecasts to understand that they merely represent well-educated, well-informed approximations that could easily be thrown off.
"The error band is a lot wider now than it might ordinarily have been in calmer times," Prof. Gordon said. "[Mr. Carney]is not overselling his forecasts: He always says, 'these are projections, and they could be wrong for any number of reasons,' and then he goes on to list the reasons. It would be more of a problem if we thought [forecast misses]were leading to bad policy decisions, and that's far from clear."