If there were any doubts before, the Bank of Canada made it crystal clear in its interest rate policy statement Wednesday: It isn't about to let a fattened inflation rate distract it from its prize. And that prize isn't nearly within grasp.
The central bank, as universally expected, left its key policy rate unchanged at 1 per cent (where it has sat for nearly four years now). And, again, it signalled that this isn't going to change any time soon (economists' best guess is mid-2015), and that rate cuts are still not out of the question.
Still, Bank of Canada Governor Stephen Poloz and his colleagues had some explaining to do – specifically, on how they are able to square their stay-the-course position with an inflation rate that has rocketed ahead of plan. Canada's consumer price index (CPI) inflation surged to 2 per cent in April – matching exactly the inflation target that is supposed to be the central guide for the Bank of Canada's rate policy, and, what's more, getting there about nine months ahead of the bank's expectation. But while acknowledging this, the statement steadfastly informed us that "the downside risks to the inflation outlook [are] as important as before."
Mr. Poloz sees inflation as a temporary aberration, juiced by a spike in energy prices and a slump in the Canadian dollar that will simply work their way out of the numbers in time. And the core CPI (which excludes the most volatile components such as food and energy), which at 1.4 per cent is also running ahead of the bank's projections, is still well below the bank's 2-per-cent target – and it's the core reading that generally matters more to the central bank, anyway.
This is hardly a new message, though it's the first time Mr. Poloz has tried to sound worried about the threat of disinflation (a very big deal at the start of this year) while staring down a 2-per-cent inflation rate. But the fact is, he's still not seeing traction in the drivers necessary to sustain inflationary pressures.
For starters, Canada's economic growth was a pallid 1.2 per cent annualized rate in the first quarter, while growth outside of Canada was weaker than expected – not inspiring for an export-oriented economy. The United States saw its economy actually contract in the first quarter, probably due to weather-related slowdowns, but still, ample reason for caution.
Meanwhile, Wednesday's trade statistics – though too late to have influenced the Bank of Canada's statement – certainly provided no balm for Mr. Poloz's chief worries. After two months of solid surpluses, Canada swung to a $638-million deficit in April, its worst trade performance in five months. Exports, which Mr. Poloz has repeatedly identified as one of the critical elements for a sustained acceleration in the Canadian economy, suffered a setback from their recent improvements – down 1.8 per cent in April from March, on declines in both prices and volumes.
Imports looked more promising – up 1.4 per cent, to a record $9-billion, demonstrating evidence of domestic demand. But the source of the growth wasn't at all what the central bank has been looking for. Most of the gains came from consumer products; imports of machinery, equipment and parts – a key indicator of business capital investment, the other critical element in Mr. Poloz's vision for sustained growth – actually fell 1 per cent.
Now, the bank does have faith that, as the statement said, "the ingredients … remain in place" for a pickup in exports and business investment – although it indicated that on both fronts, the current lower exchange rate on the Canadian dollar is a key supporting factor. (This is being interpreted on some fronts as a further attempt by the central bank to "talk down" the currency, but if it is, it's certainly one of its milder efforts.) But sustained growth isn't evident yet. Until it does, this central bank is going to treat rising inflation with, if not outright shrugs, an ample does of skepticism.