Stephen Poloz wants to make sure we keep our eye on the right ball when gauging the Canada's monetary policy direction. His message: Don't pay too much attention to the current upward pressures on inflation. They won't matter much unless we get the follow-through on exports and business investment that the Bank of Canada boss has long been waiting for – and for which he has adopted an increasing tone of urgency.
The central bank's latest interest-rate statement and Monetary Policy Report (MPR), released Wednesday morning, acknowledged what has become obvious to most observers – that Canada's low inflation rate no longer looks as frightening as it did a few months ago. The bank raised its forecasts for consumer price index (CPI) inflation for each of the next six quarters; as a result, it now sees total CPI inflation reaching the bank's 2 per cent target in the first quarter of 2015, three quarters earlier than it had previously forecast.
But don't think that this implies earlier-than-expected interest rates increases from the central bank, despite the fact that the bank's rate policy is intrinsically tied to its 2-per-cent inflation target. The bank is clearly emphasizing its "core" inflation measure, which excludes highly volatile elements such as energy and food prices, and which it says won't reach the 2-per-cent target until the 2016 first quarter. Indeed, the bank sees the recent resurgence in inflation as being driven by energy prices and the slide in the Canadian dollar – pressures that it largely dismisses as "temporary."
These are, essentially, "cost-push" inflation factors – they drive domestic consumer inflation by pushing up costs for producers who in turn pass them along to their customers. They aren't driven by accelerating demand, which is a much more healthy and desirable form of inflation. This is where Mr. Poloz's focus lies – and where his nervousness is increasing.
Mr. Poloz has been saying pretty much since he took over the Bank of Canada Governor's job last summer that the key to sustainable economic growth – complete with healthier inflation levels – is a recovery in Canada's exports. That would drive domestic demand, provide the fuel for businesses to invest more to expand capacity, and feed a virtuous circle of growth, wealth and productivity. It will come, he has said confidently.
Yet for the most part, he's still waiting for it to come – and his tone on the topic has now shifted from confident to urgent.
In the rate statement, the central bank reiterated that it still sees "a gradual strengthening in the fundamental drivers of growth and inflation" in Canada. However, it added that its view "hinges critically on the projected upturn in exports and investment." This is new language – the strongest yet that bank has used to emphasize just how important these ingredients are.
It's not that the central bank has lost its optimism on these fronts. It noted that "a range of export sectors" have been showing growth in line with the pick-up in the U.S. economic pace, and expects this to continue, with the weaker Canadian dollar lending support. It asserted that the boom in U.S. shale oil production should have only a "fairly limited" impact on Canadian oil exports. It believes high oil prices and rising export demand will stimulate business investment. Its recent Business Outlook Survey indicated that machinery and equipment investment intentions in the manufacturing sector are on the rise.
But the bottom line is, unless these exports and business investments gain traction, all bets at the Bank of Canada are off. And the longer Mr. Poloz and his colleagues wait, the more critical this point has become.
Follow David Parkinson on Twitter at @ParkinsonGlobe.
David Parkinson