The weak dollar and expectations of a stimulus-heavy federal budget led Bank of Canada Governor Stephen Poloz to hold the line on interest rates as he waits to see what the government has in store for Canada's struggling economy.
In an unusually candid recognition of the role fiscal policy can play to help the Canadian economy, Mr. Poloz said the coming budget was a key factor in shelving the bank's initial thinking that a further interest-rate cut was warranted.
After the stand-pat announcement, the Governor preached patience in the face of a bleak economic landscape – the value of the Canadian dollar has fallen sharply, the bank again cut the country's GDP growth forecast for 2016 and the price of oil continues to plummet.
Now the pressure is on Finance Minister Bill Morneau to deliver a budget that will quickly boost economic growth through billions in deficit-financed spending on infrastructure projects such as public transit, social housing and green energy.
However, the Liberal Party's own economic growth forecasts have proven to be overly optimistic, meaning that delivering on spending promises will likely result in larger annual deficits than the $10-billion limit promised during last year's election campaign. But the government won't say how far beyond that target it's willing to go.
Providing a rare window into the bank's internal discussions, Mr. Poloz said that he and his advisers were leaning toward an interest-rate cut, but decided to wait for the budget.
"The likelihood of new fiscal stimulus was an important consideration," he said Wednesday, after releasing the bank's quarterly monetary-policy report and announcing that the bank's overnight interest rate would remain at 0.5 per cent.
The Governor acknowledged that growth has stalled. But he appealed for more time as the weaker dollar and already-low interest rates ease the painful shift away from the oil-driven economy of the past decade.
"We need to be patient," he said. "While that adjustment sounds mechanical, in fact, it's personal. It's disrupting the lives of many Canadians, whether through job losses or through higher prices for imported goods."
The bank now expects real gross domestic product growth of 1.4 per cent, down from its October forecast of 2 per cent.
Mr. Poloz said there is an "asterisk" to that forecast because it could very well improve based on what the central bank sees in the budget.
Some economists suggested the central bank may have been influenced by the dollar's recent plunge below the psychological threshold of 70 cents (U.S.), sparking angst among consumers who now face sharply higher prices for imported groceries and foreign travel.
"One of the key factors that kept the Bank of Canada on hold was that the Canadian dollar has fallen too far, too fast," Merrill Lynch economists said in a research report. "The Governor played it safe and stayed on hold, even as global risks continue to mount."
Lower interest rates here generally make the Canadian dollar less attractive as foreign investors seek better returns elsewhere. A lower dollar drives up import prices and sparks inflation, but also helps make Canadian exports more competitive, particularly in the United States.
The bank said the economic environment remains "highly uncertain."
The bank's assessment of the Canadian economy reiterated the view that the drop in oil prices – which are now 75 per cent below the June, 2014, peak – will lead to a complex and lengthy adjustment.
"That will mean the continuation of a two-track economy, with the resource sector shrinking and other sectors picking up speed," Mr. Poloz told reporters.
UBC economist Paul Beaudry said those sectoral and regional differences mean the federal budget should be more targeted in responding to the layoffs in the commodities sector.
The bank's report noted that interprovincial migration to Alberta in the third quarter of 2015 was at its lowest since 2010, while more Albertans moved to British Columbia. Ontario registered the largest inflow of migrants from other provinces since 2002.
Encouraging more of that movement through employment insurance or other training support programs should be part of any federal stimulus, said the professor.
"We really have to think there's a lot of people that moved to Alberta that probably won't find good jobs for a while. Trying to support that at this point is a little bit the wrong policy," he said.
The Bank of Canada manages monetary policy independently of the government. Bank of Canada governors and finance ministers are careful to avoid the appearance of suggesting what the other should do, though they do consult each other privately.
The bank's decision fits with concern that Canada has been relying too heavily on monetary policy as the response to persistently sluggish growth.
"The policy mix at this point is askew," McGill economics professor Chris Ragan said. "Monetary policy is very, very expansionary to the point that it is more or less pushing on a string. … There is a pretty strong case to be made for tightening monetary policy and loosening fiscal policy."
The overall sense of optimism from Mr. Poloz Wednesday left some economists scratching their heads.
"I feel like the economic forecasters at the Bank of Canada are living in a parallel universe where things are a lot rosier than here on planet Earth," said Sherry Cooper, chief economist at Dominion Lending Centres.