When Bank of Canada governor Stephen Poloz ascends to the podium at a St. John's Board of Trade lunch this Wednesday, he may want to take a deep breath during the polite applause and coffee-cup clatter.
The speech he will be about to deliver could be one of the most closely scrutinized of his central-banking career. Mr. Poloz's speech in the Newfoundland capital comes just three weeks after a Bank of Canada interest-rate increase that caught many central-bank watchers off guard and raised questions in some quarters about the timeliness of the bank's communications. The speech – the governor's first public words since July – will deliver something the bank conspicuously didn't provide three weeks ago: A detailed accounting of the bank's current assessment of the Canadian economy and how that persuaded it to immediately raise rates without advance warning.
The focus of the address – "recent developments in the Canadian economy and the implications for monetary policy" – indicates that this will essentially be an economic-outlook update in between the central bank's formal quarterly Monetary Policy Report updates, probably similar to the economy-focused (and highly newsworthy) speech Mr. Poloz's senior deputy, Carolyn Wilkins, gave in Winnipeg in June. While that June speech signalled a coming rate hike, this one will explain a past one – and, perhaps, give crucial glimpses of what lies ahead.
The speech is expected to fill the information vacuum left by the early-September rate hike, which was accompanied only by the characteristically terse statement that the bank releases with its rate decisions, providing only a handful of paragraphs of bare-bones economic analysis. Anything the speech doesn't clear up, reporters will have a shot at asking the governor at his postspeech news conference. We'll know a lot more about what Mr. Poloz and his colleagues are thinking by Wednesday afternoon.
Needless, to say, the markets have been hungry to know more.
Working on the thin information in the rate statement, the market certainly got the impression that the hike signalled a more aggressive path for interest rates in the coming months. The Canadian dollar jumped nearly 2 cents (U.S.) in the days after the rate announcement. The bond market is now essentially pricing in one additional rate hike by next spring.
But the retreat of the currency since its posthike rally – it has now given back almost all of those gains – is partly an indication that the markets aren't so sure about the Bank of Canada's intentions any more.
A speech last week by one of Mr. Poloz's deputy governors, Tim Lane, indicated that the central bank is worried about the negative economic impacts of a stronger Canadian dollar (up 10 per cent against its U.S. counterpart since early June), particularly on the export front. Mr. Lane said the bank "will be paying close attention" to how the economy reacts to the stronger currency.
"As the Canadian dollar is strengthening, we're certainly watching that closely and we'll be taking that into account pretty strongly in making our decisions," Mr. Lane said during the audience Q&A following his speech.
Given that the rate hikes have been the key driver behind the dollar's surge, Mr. Lane's comments suggested to some observers that the Bank of Canada wants to take its foot off the rate accelerator following its two summer increases – perhaps to give time for the U.S. Federal Reserve and other key foreign central banks to tighten their own monetary policies and take currency traders' focus off the loonie.
"Since the Canadian dollar has been heavily driven by interest rate differentials, look for Governor Poloz to drop further hints that additional rate hikes will be slow in coming," said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, in a research note last week. "That should see markets reduce the implied odds for an October or December [rate increase], and take the shine off … the Canadian dollar."
The markets will also be eager to hear what Mr. Poloz thinks about the latest economic figures that have rolled out since the rate hike – which have included declines in both export and retail-sales volumes, both negative signals for third-quarter economic growth. (July gross domestic product figures will be released Friday; most economists expect them to show just 0.1-per-cent month-over-month growth, which would be the slowest in five months.)
Of particular interest will be the governor's views on inflation, a central factor in the bank's interest rate decisions. The latest figures, released Friday, show that the inflation rate did climb to 1.4 per cent in August, from 1.2 per cent in July and its second straight gain. That's still a long way from the central bank's 2-per-cent target, but it may indicate that this year's slump in inflation has turned a corner. However, the August increase owed much to a jump in gasoline prices, which was partly fuelled by temporary shortages stemming from Hurricane Harvey – suggesting that the gains may be fleeting.
On the other hand, two of the central bank's three core measures of inflation – which are meant to see through temporary gyrations to give a clearer view of underlying inflation pressures across the economy – inched higher in the month, which at least modestly supports the Bank of Canada's view that inflation is destined to recover toward the target, in line with the economy's strong growth this year. The question is whether Mr. Poloz considers the inflation evidence convincing enough to pave the way for further rate hikes in the near term.