The Bank of Canada isn't ready to cut interest rates if the country's alarmingly slumping inflation rate continues to fall, as some monetary experts have recommended. But the central bank's latest statement on its rate policy suggests that the country's disinflationary trend is nudging the bank ever closer to such a move.
The central bank, as widely expected, left its key policy rate unchanged at 1 per cent – the level it has maintained for more than three years now. But significantly, the bank warned that "the downside risks to inflation are greater" than they were in October, when it released its previous statement and its quarterly Monetary Policy Report. It also removed its previous projection that inflation will gradually return to the bank's 2 per cent target around the end of 2015; the policy statement is now silent on when inflation will reach the target.
It does, however, state the obvious – that the target is growing more distant, not less. The year-over-year consumer price index (CPI) inflation rate has been waffling on either side of 1 per cent, the bottom of the Bank of Canada's target band of 1-to-3 per cent, for more than a year now, and since mid-summer it has been falling; it sat at a mere 0.7 per cent in October. (The November CPI report will be published on Dec. 20.)
Strategists at Royal Bank of Canada noted that in each of the past two inflation reports, almost 80 per cent of the components of core CPI (which excludes volatile components such as food and energy) were growing at less than 2 per cent. The Bank of Canada itself noted in its statement that price cuts among retailers, the result of increased competition, "look to be more persistent than anticipated."
With all that, why wouldn't the central bank go further and actually signal a bias toward rate cuts, especially if disinflation persists? Because its other big worry – household debts – aren't in shape yet. Indeed, the bank said in the statement that "the risks associated with elevated household imbalances have not materially changed." Even a hint of lower interest rates could undermine the bank's desire to discourage household borrowing, particularly in the mortgage market.
If there was one place where the Bank of Canada's statement did look a little brighter, it was on the housing front. The bank said that while housing has been stronger than expected, it called the strength "is consistent with updated demographic data and a pulling forward of home purchases in light of favourable financing conditions." In other words, the pace can be justified by the pace of new household creation, and can be expected to ease once interest rates start to climb. It concluded that it still expects a "soft landing" for the housing market.
Preliminary monthly statistics this week from the real estate boards in Toronto, Vancouver and Calgary show continued strong home sales and prices in November compared with a year ago, but the pace did cool significantly from October. The growth of household credit also slowed in October, and was down significantly from a year earlier. These are steps in the right direction for the Bank of Canada; it's not ready to undo them with a disinflation-fighting rate cut. (Though, ironically, slowing consumer credit is certainly a contributor to the inflation slowdown.)
Still, the bank's new language is a definitive step toward taking a stronger stance against disinflation if necessary. By toughening the wording without formally adopting a more dovish bias on rates, the bank buys itself a little more time for its other key issues to clear the path.
David Parkinson