The Bank of Canada may have made its battle against household debt the centrepiece of Tuesday's statement on interest-rate policy, but it's not the only rising concern brought to light in the 489-word document.
Comparing the statement to the central bank's previous rate-setting statement in early September, the bank uses more pessimistic language about both the domestic and global economies, and about Canada's export prospects. Its expectation on inflation has weakened. And it's not particularly pleased with the factors that have been keeping the Canadian dollar strong.
First, the big numbers on the Canadian economy: The central bank projects growth of 2.2 per cent in 2012, 2.3 per cent in 2013 and 2.4 per cent in 2014. Hardly stellar numbers, but essentially unchanged from its previous forecasts.
However, the bank did acknowledge that Canada's economy has suffered a setback. While in early September it was still saying that "underlying momentum remains at a pace roughly in line with the economy's production potential" – code for "rate hikes aren't far off," as full-capacity economies typically fuel inflationary pressures – now it is saying that the economy went through "a recent period of below-potential growth," and will only return to full capacity "by the end of 2013."
On the foreign front, the central bank is now talking about a "continued contraction" in Europe, and saying that China and other emerging economies have "slowed somewhat more than expected." It added the word "weak" to describe export demand, and said it now expects Canadian exports won't return to pre-recession levels "until the first half of 2014" – pushed back from "the beginning of 2014" in the September statement.
On inflation, the bank indicated that with a "small degree of slack" having opened up in the economy, the outlook for price increases has been pushed back. Total consumer price index (CPI) inflation is now projected to return to the bank's 2-per-cent target "by the end of 2013" – back roughly a quarter of a year from its previous call.
But aside from the household-debt comments, the new wording surrounding the strong dollar might be the most intriguing new twist in the statement. The central bank added the comment that the currency's strength "is being influenced by safe-haven flows and spillover from global monetary policy."
This hints broadly at something the Bank of Canada has talked about before: The difference, in policy implications, between "good" currency appreciation and "bad" currency appreciation. The "good" kind, when the dollar rises because of underlying strength in the Canadian economy and trade flows, is sustainable and justified by the underlying conditions. The "bad" kind is fuelled by speculative trading and external factors that are inconsistent with the fundamentals, and effectively creates a drag on the Canadian economy.
We're in "bad" territory now. The fact that the central bank is making note of it is an indication that it is frustrated by the threat, and its counter-productive effect on Canada's ability to accelerate its growth pace. It's also a sign that on the path toward eventual rate increases, the sky-high currency will be a serious road block.