Bank of Canada Governor Stephen Poloz wants the world to know that Canada's economy isn't quite as robust as recent indicators suggest.
The central bank kept its key interest rate unchanged Wednesday at 0.5 per cent – where it's been since July, 2015 – and it repeated previous warnings about the "significant uncertainties" buffeting the economy.
The most significant of those uncertainties is the threat of protectionist tax and trade policies by the United States, including a proposed border adjustment tax.
Reflecting a glass-half-empty tone, the bank said the recent uptick in consumer prices is likely fleeting, while highlighting key negatives, including labour market weakness, struggling export competitiveness and Canada's growing divergence from the rebounding U.S. economy.
All of that reflects "persistent economic slack in Canada, in contrast to the United States," the bank said in an unusually terse rate-setting statement.
The subtext of the statement is that Mr. Poloz and his central bank colleagues are unnerved by both the strength of the Canadian dollar and a recent run-up in some longer-term interest rates, and they want to keep a lid on financial market enthusiasm. The Canadian dollar dipped to a five-weak low following the statement, closing at 74.99 cents (U.S.).
Mr. Poloz has insisted in recent months that a rate cut remains "on the table." But many economists are convinced the bank's next move will be a rate increase as the economy improves, although perhaps not until next year.
Bank of Montreal economist Benjamin Reitzes said the statement is a "placeholder" by the central bank, designed to keep downward pressure on both the Canadian dollar and bond yields. "The Bank of Canada is just waiting and watching at this point," he said.
In contrast, the U.S. Federal Reserve appears poised to resume hiking rates. The Fed has already raised its benchmark federal funds rate twice since the start of 2015, and anticipation is growing that it will do so again at its March 15 meeting following recent statements by top Fed officials.
The statement acknowledged that economic conditions are improving. Consumer prices perked up in January and growth in the final three months of last year "may have been slightly stronger than expected," the bank said.
Many economists expect fourth-quarter growth figures – due out Thursday – will show the economy grew at an annual rate of more than 2 per cent, significantly better than the Bank of Canada's forecast of 1.5 per cent.
But the bank pointed to a number of offsetting factors. The statement said January's 2.1-per-cent jump in the consumer price index is likely only temporary, driven higher by new carbon pricing measures in Ontario and Alberta. The statement also pointed out that exports are still facing "competitive challenges," and that the job market is struggling with slow growth in wages and hours worked.
Canadian businesses are bracing for the potential negative fallout from whatever U.S. President Donald Trump and Congress do on trade and taxes. There are proposals for a border adjustment tax that would penalize foreign goods, a lower U.S. corporate tax rate, new "Buy American" restrictions and renegotiation of the North American free-trade agreement. All of these could inhibit exports to the United States, the market for three-quarters of Canadian goods exports.
"We have had no clarity on the major threat to Canada's outlook: rising U.S. protectionism and the application of a potential border-adjustment tax," RBC Dominion Securities analyst Mark Chandler said in a research note.
The Bank of Canada's next rate-setting date is April 12. The bank will also issue its next quarterly forecasts at that time.