So desperate is Bay Street to understand when Bank of Canada Governor Mark Carney will raise rates that one adverb in a 3,131-word speech has the power to jolt financial markets.
Mr. Carney modified his 11-month-old promise to leave borrowing rates at a record low until the end of June by adding a single word: He said the pledge was "expressly" conditional on the outlook for inflation. That was read by many analysts as a signal the Bank of Canada could raise its benchmark rate before summer.
Prior to yesterday, the rate pledge was simply "conditional" on the outlook for prices. The change in language was coupled with an acknowledgment by Mr. Carney that inflation is running "slightly firmer" than the Bank of Canada had predicted in January.
That combination of fact and nuance was enough to cause investors to prepare for an interest rate increase in the next few months. The six-month overnight index swap rate, which is based on the average that investors expect for the bank's policy rate over that period, rose 5.1 per cent to 0.415 per cent, the highest rate in more than a year, according to Bloomberg News.
"It could easily be an innocuous reference to that which is already in the public record," HSBC Securities economist Stewart Hall said. "Fair enough. But for markets charged with pricing money in the here and now, these are far from innocuous times."
The Bank of Canada's marching orders from the federal government are to do nothing more than keep prices advancing at a pace of about 2 per cent a year. As Canada's recovery gains vigour, inflation is beginning to perk up.
The measure of inflation the Bank of Canada uses as a guide to where overall prices are headed - the core rate, which subtracts volatile items such as food and energy - touched 2.1 per cent in February, a pace the bank wasn't expecting until at least the second half of 2011.
Some economists have dismissed the stronger core rate as the result of temporary factors, such as a surge in hotel costs related to the Vancouver Olympics. Mr. Carney agreed that some of the increase is the result of "transitory factors," but also said that a "higher level of economic activity" is also playing a role, suggesting policy makers are taking the jump in the core rate seriously.
Mr. Carney's musings about inflation are important because he and his senior advisers are grappling with when to raise the benchmark overnight lending target from its current record low of 0.25 per cent.
The bank plans to provide a full update on its latest thinking in its next quarterly economic update on April 22. Mr. Carney repeatedly emphasized that his path will be guided by inflation, telling reporters that the commitment to hold the rate at its current level until at least the end of June is an "expectation" not "a promise."
The rate decision is a delicate one, which explains why Mr. Carney avoided drawing conclusions about the economy based on recent indicators that suggest Canada's recovery is well entrenched.
A higher overnight target will cause consumer and business borrowing rates to rise and could put further upward pressure on the dollar, potential impediments to a recovery that most policy makers, including Mr. Carney, still consider fragile because it is reliant on heavy government spending and rock-bottom borrowing costs.
Speaking at a press conference, Mr. Carney cautioned against reading too much into his remarks. He said he added "expressly" to his description of the Bank of Canada's inflation commitment to freshen up a statement that has been repeated for almost a year.
The "broad strokes" of the Bank of Canada's outlook are unchanged, Mr. Carney said. While the first quarter appears to be stronger than expected, demand could tail off as government stimulus programs end, he said.