This week's Bank of Canada interest-rate decision promises to be duck-like.
On the surface – the bank's key rate itself – all will look calm. All the action will be underneath, as the central bank paddles like mad to bring its outdated economic outlook up to speed with a Canadian economy that has improved much faster than the bank anticipated. Where all that paddling takes the bank's forecasts will say much about the future path of interest rates – even if, for the time being, the bank looks content to hold its key rate steady at 0.5 per cent, where it has been since last July.
Bond markets have priced in a near-zero likelihood of a rate change at Wednesday's setting, the third of eight scheduled rate decisions by the BoC this year. Earlier in the year, central bank watchers were eyeing the possibility of another rate cut, to go with the two the bank made last year, to lend further support to a stubbornly sluggish Canadian economy that has been bogged down by the after-effects of a severe oil shock. But with the economy blasting out of the starting gates in 2016, rate cuts are off the table.
Instead, attention will focus on the Bank of Canada's new economic forecasts in its quarterly Monetary Policy Report, which it will release at the same time as its rate announcement. The big question will be how much the bank is prepared to upgrade its outlook for an economy that, while looking much brighter, is by no means out of the woods yet.
The economy entered 2016 running at a higher pace than the bank had believed, thanks to a 0.8-per-cent annualized growth rate in the 2015 fourth quarter, notably above the flat reading the bank had estimated in its January outlook. That momentum carried over into the new year. Private-sector economists believe Canada's real gross domestic product growth in the just-ended first quarter may have been as much as triple the 1 per cent that the Bank of Canada forecast in January. They also believe growth for the full year could be in the range of 2 per cent, well above the bank's 1.4-per-cent projection in January.
It's also noteworthy that until now, the Bank of Canada's forecasts have not included the anticipated economic boost from Ottawa's planned spending increases, as the federal government hadn't committed firm numbers to its plans prior to the March 22 budget. The bank will incorporate the impact of that spending into its new outlook, which should give the forecasts an additional lift. But the impact may be modest for 2016 – adding only about 0.1 percentage point to growth in the current year, Toronto-Dominion Bank economist Brian DePratto estimated in a recent report.
The central bank got its last piece of the current economic puzzle on Friday, when Statistics Canada's Labour Force Survey showed that the country added a booming 41,000 net new jobs in March, quadruple the modest expectations of economists. While the strong report was largely seen as correcting for a couple of small declines in January and February – numbers that looked surprisingly weak given the otherwise impressive flow of economic data in the first two months of the year – it nevertheless added an improving labour market to the list of signs that the economy has picked up momentum.
But another key indicator for the Bank of Canada – the all-important exports, which the central bank has been counting on to lead the country's recovery – took an untimely stumble just as the bank's senior officials were sitting down last week to begin their interest-rate deliberations. Statistics Canada reported that Canadian exports slumped 5.4 per cent in February, the biggest one-month slump since the 2009 recession, reflecting a broad-based decline in volumes.
Many experts have noted that the decline came after exports hit a record high in January – providing a key source for the economy's hot start for the year. Still, given the importance the central bank has placed on non-resource exports to fuel the economy's growth this year, February's sharp drop could inject a note of caution into the Bank of Canada's economic outlook. Nomura Securities economist Charles St-Arnaud said the trade downturn, coupled with a surprising 32,000-job decline in manufacturing employment in the March jobs report, "could be a signal that the recovery in non-resource exports is likely to be uneven."