An increasingly important economic index suggests that the Bank of Canada, despite its concerns about domestic household debt, may have difficulty maintaining its monetary tightening bias when announcing rate policy on Wednesday.
Citigroup's Economic Surprise Index for Canada measures the degree to which economic data is released above or below consensus economist expectations. As an example, when Building Permits were released on January 10 showing a decline of 17.9 per cent, 13 per cent worse than expected, the Surprise Index fell. Conversely, the positive surprise on domestic employment announced January 4 caused the index to move higher.
As this chart shows, the Citi Economic Surprise Index for Canada has been steadily sliding lower, as major economists cannot reduce their projections quickly enough. This suggests a weaker economic environment ahead for Canadians.
Prominent economists agree that slower expected growth is pushing the Bank of Canada away from its threats to increase interest rates in the months ahead. Bank of Montreal's Benjamin Reitzes writes:
"it looks as though the Bank of Canada will downgrade its growth forecast and probably push the closing of the output gap into 2014. Accordingly, there's little inflation pressure, which points to downward revisions to the Bank's inflation forecasts as well."
The central bank remains concerned about household debt levels, which have been at record highs near 95 per cent of the country's gross domestic product since 2010. Increasing interest rates would likely reduce credit growth, but the potential to stall a sluggish economy while inflation pressure is minimal will prevent the Bank from doing so.