The Bank of Canada is already seriously disinclined toward raising interest rates over the next year. Now it has all the reasons in the world not to.
As the central bank prepares to deliver its next rate decision and quarterly Monetary Policy Report on Wednesday, its staff writers have no doubt been working overtime just to keep the documents up to date with the break-neck flow of economic and market worries this month.
But while it might have made writing the policy documents harder, the turmoil has probably made the bank's communications job easier. Expect the bank to hold its policy rate steady at 1 per cent (an absolute slam dunk), and to lay out a whole new wave of risks justifying its low-rates-for-longer policy outlook.
The central bank has spent much of this year quashing any public musings about a rate hike in the next year, but that has proven a tough sell amid rising growth, surging inflation and record exports.
The bank has recast its message along the way, identifying new risks and mitigating factors to play down the economic data that have outpaced its forecasts.
Governor Stephen Poloz has gone to lengths to dispel a market perception that his caution on rates is motivated less by the economic numbers than by a desire to drive down the Canadian dollar and lend a hand to manufacturing exporters. Segments of the market have wondered at times whether the central bank was wrong, in denial or not entirely above board.
But the past few weeks have handed the Bank of Canada more than enough ammunition to convince skeptics that its caution on rates is warranted.
Oil prices are in free fall. Europe teetering on the edge of recession and, worse still, deflation. Escalating ISIS tensions. Escalating Ebola fears. And perhaps most importantly, nauseating plunges in financial markets that, let's face it, have left a battered public more open to a let's-be-careful-here message.
In his last Monetary Policy Report, in July, Mr. Poloz harped on "serial disappointment" as his new favourite catchphrase – the notion that, whenever the global economy has looked good during a five-year "recovery" that hardly warrants the name, it keeps sliding back and letting us all down.
This month has been serial disappointment in full, vibrant, living colour. It's almost a gift-wrapped "I told you so" for Mr. Poloz, perfectly timed for his quarterly monetary sermon. It might not exactly make him happy, but it makes him look right.
Not that Poloz and Company don't still have some explaining to do. Their economic forecasts have, for most of the year, been playing catch-up with the evolving reality (and not particularly successfully at that).
The bank needs to fix the perception that its outlook is out of touch.
Last Friday's consumer price index report showed total inflation running at 2 per cent, year over year, in September, right in line with the central bank's inflation target midpoint.
But core inflation – which excludes the most volatile components, including fuels and many foods, and which the Bank of Canada leans on as its most important indicator of underlying inflationary trends – sits at 2.1 per cent, well ahead of the 1.7 per cent the bank forecast for the third quarter in its July MPR. Indeed, the central bank didn't think core inflation would reach the 2-per-cent sweet spot until the third quarter of 2016. It has arrived two full years early.
So far, the bank has stuck to its argument that CPI has been jacked up by transitory factors that are due to fade out of the numbers by early next year, and the economy still has too much slack to sustain inflation at these levels. But as inflation continues to run years ahead of the bank's projections, the markets expect the bank to adjust its numbers, if not necessarily its rationale.
Similarly, economists estimate that real gross domestic product grew at an annualized rate of 2.5 per cent in the third quarter, above the Bank of Canada's forecast of 2.3 per cent.
The bank reduced its growth forecasts in July, but after a summer of generally strong economic data – most notably a surge in exports, on of the central bank's oft-stated keys to a healthy, sustained economic recovery – the bank may need to tweak its targets higher again.
But throwing a spanner into the works is the falling oil price, which threatens a sector that has been a critical driver of Canada's economic growth and export resurgence.
The central bank will want to spend some time in the MPR explaining how it views the potential impact of sharply lower oil prices on both inflation and economic growth. There's plenty of debate about whether the benefits to consumers and energy-intensive industries can sufficiently mitigate the drag on the energy business, especially when the economy has been leaning so heavily on the sector; the Bank of Canada's interpretation will matter more than most.