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At last, the Bank of Canada is acknowledging what plenty of business people and more than a few analysts have been saying for the better part of two years. Canada's economic engine is sputtering, that troubled U.S. and emerging export markets are in no position to provide a badly needed lift and that previous forecasts were simply too rosy.

This welcome embrace of reality has prompted the central bank to jettison its tightening bias – essentially an explicit warning for the past 18 months that interest rate hikes were on the horizon as the economy strengthened and inflation crept up. In other words, we could all count on rates returning to something resembling normal sooner rather than later.

Despite the bank's hectoring, consumers blithely went on borrowing up to their eyeballs anyway.

The I-told-you-so missives are pouring in from Canada watchers who have long suggested the bank is more likely to loosen policy in coming months. Not least because it's one of the few central banks in the developed world with actual room to do so in the face of a faltering economy.

The Bank of Canada's key borrowing rate has remained at 1 per cent for more than three years, while the Fed is at 0.25. One wag labelled Governor Stephen Poloz "Yellen of the North" for dropping the tightening language. (Janet Yellen, tapped to be the next Fed chair, has long been known as an extreme dove when it comes to monetary policy.)

But Mr. Poloz isn't about to start trimming rates, because he is in a quandary of the bank's own making. He has recognized the real elephant in the room – the heightened risk of economy-strangling deflation. He has also reasserted the bank's commitment to price stability. When faced with a darkening economic outlook and an inflation rate sitting close to the 1 per cent danger zone, the traditional response would be a cut in rates. But in terms of actual policy, the bank might as well still be living on Fantasy Island. It can't lower rates to deal with this threat without worsening the consumer credit situation and blowing more helium into the real estate bubble.

"[T]he fact that inflation has been persistently below target means that downside risks to inflation assume increasing importance," Mr. Poloz declared Wednesday. But "the bank must also take into consideration the risk of exacerbating already elevated household imbalances."

So there you have it. The magician has run out of rabbits to pull out of his hat.