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The Bank of Canada’s update of its economic and policy outlook is a remarkably upbeat document. Everywhere except on the bank’s policy bottom line.

In Wednesday’s interest-rate announcement and quarterly Monetary Policy Report, the central bank dramatically increased its growth projections over the next two years. It moved forward its expectations for the world’s advanced economies to achieve broad immunity from COVID-19 by half a year – to the end of 2021. It lauded the sooner-than-expected arrival of vaccines for reducing crippling uncertainty and clearing a path to a rebirth of consumption, business investment and trade.

And yet when it came to the question of how this clearly brighter picture affected the bank’s intentions with monetary policy, the answer was, barely at all. The bank did not budge on its position that inflation wouldn’t sustainably return to the bank’s 2-per-cent target – its criteria for beginning to increase the record-low interest rate of 0.25 per cent – until 2023. It didn’t even hint at when it might ease the throttle on its $4-billion-a-week of government bond purchases under its quantitative easing (QE) program, beyond signalling that it would do so once it “gains confidence in the strength of the recovery.”

Why is the central bank so reluctant to reflect this economic optimism in policy stance? The key could lie in its growing concern about the rising Canadian dollar – and its wariness about throwing fuel on that fire.

The dollar is often the Bank of Canada’s elephant in the room – an ever-present factor influencing its economic outlook, yet talked about sparingly out of fear the bank will be accused of compromising its officially agnostic position on the currency’s value. So when the bank is discussing in some detail about its currency views – as it did Wednesday – you want to pay attention.

The Canadian dollar is at its highest levels in nearly three years against its U.S. counterpart, and up 3 cents (U.S.) from the bank’s previous outlook in October. In the MPR, the bank identified the appreciation of the currency as one of the biggest downside risks to its economic forecast. It warned that the rising currency is creating a “headwind” for the recovery of Canada’s critical export sector, by making Canadian goods more expensive for foreign buyers.

In a news conference following the release of the MPR and rate decision, Bank of Canada Governor Tiff Macklem said that the bank wouldn’t consider this problematic if the currency gains reflected the strength of the Canadian economy. They don’t.

“Most of the appreciation of the Canadian dollar is coming because of a broad-based depreciation of the U.S. dollar. That’s not a made-in-Canada development. So, the exchange rate is becoming a factor in its own right in our projection,” he said.

In this light, the bank’s resistance to adjusting its policy stance despite the improving medium-term outlook starts to make more sense.

A major driver for currency trading in the coming months will be speculation about when central banks will start to unwind their aggressive policy positions adopted in the pandemic. To tip its hand on this front now - in the midst of a very difficult (if temporary) second wave - would toss an anchor to an economy struggling to keep its head above water.

This leaves the bank treading a fine line between presenting a transparent picture of its outlook, and signalling future policy implications that could actually undermine that outlook at a particularly sensitive time.

So, the bank opted to move the policy needle ever so slightly. Both in the rate announcement and in Mr. Macklem’s comments, it signalled that if the economy unfolds as it now predicts (or better) in the coming months, it will, indeed, start to gradually tapering down its QE purchases.

It’s not much (Bank of Nova Scotia economist Derek Holt called it a “taper whisper”), but it effectively puts the markets on notice that a move is coming; the open question of when will keep the speculators at bay for a while.

“We’ve got to get through this second wave; we’ve got to get this virus under control. We need to see a rebound coming out of the second wave,” Mr. Macklem said.

That probably means the mid-July MPR is the earliest that the bank could formally announce plans to start easing its QE program. Any time before then would lack the evidence of a rebound from the second-wave slowdown in the early months of the year, and the progress on Canadian vaccinations, to land in Mr. Macklem’s comfort zone.

By that time, any resulting impact on the currency would take place in an economy that had visibly turned the corner. Which could be exactly what Mr. Macklem wants.

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