Stephen Poloz's preoccupation with low inflation is putting the Bank of Canada governor's credibility to the test.
The central bank kept its key overnight lending rate at 1 per cent for the 31st consecutive time Wednesday – a span that stretches back to September, 2010.
The bank acknowledged that inflation pressures have come back sooner than anticipated amid surging energy prices and a lower Canadian dollar. But the rate announcement statement said these pressures are largely temporary and it warned ominously that the powerful U.S. economy is losing momentum.
"Weighing recent higher inflation readings against slightly increased risks to economic growth leaves the downside risks to the inflation outlook as important as ever," the bank said in its fourth rate-setting announcement of the year.
Mr. Poloz's focus on low inflation comes amid mounting price pressures in Canada. In April, the consumer price index reached the central bank's 2 per cent target for the first time in two years. Even so-called core inflation, which strips out volatile food and energy prices, has drifted higher in recent months.
"The average person would be somewhat perplexed to hear that the bank's biggest concern is downside risk to inflation, given what natural gas, beef and electricity prices have done over the last year," said Douglas Porter, chief economist at the Bank of Montreal.
It is a "bit of a stretch" to say low inflation is a major concern when Canadian prices are rising faster than virtually anywhere else in the industrialized world, Mr. Porter said.
But he pointed out that financial markets know the bank's overarching concern is "core" inflation, which remains well below the 2 per cent target.
Other analysts aren't convinced Mr. Poloz is striking the right tone.
The bank's insistence that disinflation remains a threat could prove increasingly tough to defend as the summer and fall wear on, Bank of Nova Scotia economists Derek Holt and Dov Zigler said in a research note. "The Bank of Canada faces a greater sales job to explain why the 'downside risks to the inflation outlook [are] as important as before,' " they said.
Krishen Rangasamy, senior economist at National Bank of Canada, wondered how long the bank can continue "playing that game without risking its credibility" as inflation heats up.
"Comes a point the central bank will have to drop the dovish language," Mr. Rangasamy said.
Some analysts have suggested that Mr. Poloz is happy to stoke disinflation fears because it helps keep the Canadian dollar low and improves the fortunes of embattled exporters. Keeping rates low for longer to spur inflation makes Canadian bonds less attractive to foreign investors.
The bank did not expect overall inflation to reach 2 per cent until early 2015, according to its most recent forecast, released April 16. At the time, the bank said the core rate would not hit 2 per cent until 2016.
A Bank of Canada official declined to comment on economists who have raised questions about the bank's credibility on inflation. But the official pointed out that the bank's July Monetary Policy Report would have a full explanation of the bank's most recent analysis and thinking on inflation.
Wednesday's statement put a mostly positive spin on other developments in the Canadian economy since the end of a first quarter weakened by harsh winter weather.
The bank said the "ingredients for a pickup in exports remain in place," including the lower dollar and strengthening foreign demand. It also said improved corporate profits bode well for companies investing more in the coming quarters.
And finally, the bank said it sees "continued signs" of a soft landing in the housing market and a "constructive evolution" of high household debt levels.
For months, Mr. Poloz and other bank officials have stressed the importance of exports and business investment to putting the economy back on track.
But so far, exports continue to underperform – a reality underscored by Statistics Canada's report Wednesday that exports dropped 1.8 per cent in April, tilting the trade balance back into deficit.
The bank's next rate-setting announcement is July 16 – when it will also release updated forecasts for growth and consumer prices.