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We blame weatherman for bad forecasts, why not Bank of Canada?

The Bank of Canada has been generally bullish in its outlook for the economy, although the most recent Monetary Policy Reports reveal Governor Mark Carney and his officials did see trouble brewing.

Graham Hughes/The Canadian Press

The news that the Canadian economy grew at a glacial annualized rate of 0.6 per cent in the third quarter was well under expectations. It was significantly lower than the Bank of Canada's forecast of 1 per cent growth, though it is possible that the third-quarter results will be revised upwards in the future.

The Bank has been generally bullish in its outlook for the economy, although the most recent Monetary Policy Reports reveal Mark Carney and Co. did see trouble brewing. In July, the Bank estimated that third-quarter growth would be 2 per cent, which was a downward revision of the April estimate of 2.4 per cent.

The same holds true for core inflation, which increased 1.5 per cent year-over-year in the third quarter. This was lower than the Bank's July estimate of 1.9 per cent and its April calculation of 2.3 per cent. Given that core inflation and economic growth tend to be positively correlated in the short-run, it is not surprising that if the Bank missed on one forecast, they would miss on the other.

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This forecast miss on the high side likely explains the Bank's decision not to cut interest rates in 2012. A loosening of monetary policy under a weaker outlook for growth would have pointed the Canadian economy further down the road of recovery. The result is a longer wait for the kind of growth that will push the unemployment rate under 7 per cent.

Missing the extent of the decline of the rate of economic growth explains the Bank of Canada's decision not to cut interest rates in 2012. Had the Bank of Canada been able to forecast the extent to which economic growth would slow, they may have loosened monetary policy to ensure the Canadian economy fully recovers. Since they did not, Canadians will have to wait even longer to see enough economic growth to get the unemployment rate under seven per cent.

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About the Author

Mike Moffatt is an Assistant Professor in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business – Western University. Mike also does private sector consulting for the chemical industry. More


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