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Bank of Canada’s source of optimism: Household spending?

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See that expectation sitting over there that the Bank of Canada will eventually raise interest rates? No need to have it removed to the scrap heap. But you might want to pick it up and move it back a little deeper into the corner.

The Bank of Canada's interest-rate announcement this morning has, for the second time in as many announcements, altered the language surrounding the central bank's feeling on the likelihood and timing of future rate moves. If we didn't get the message the first time, we're getting it now: The bank's bias on rates has, largely, shifted into neutral. (That it has taken took two rate announcements may speak to the stickiness of the transmission in such matters.)

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Late last year – just three months ago – the Bank of Canada was still sticking to its well-established mantra of "Over time, some modest withdrawal of monetary policy stimulus will likely be required." That was interpreted, quite rightly, as the bank's assertion that its next rate move would be an increase; given other information the bank was sharing, a rate hike looked likely before the end of 2013.

In January, it added a qualifier: "the timing of any such withdrawal is less imminent than previously anticipated."

Today, that has morphed into "the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required."

Translation: We're still on the road to rate hikes; they're still out there somewhere. But we've pulled over to the side of the road and shut off the sputtering engine. I'm picturing Bank of Canada boss Mark Carney walking down the highway with a jerry can, looking for a gas station.

It's significant, though, that the Bank of Canada isn't turning around – even though some economists think it should be thinking about reversing course and cutting rates. The bank is still convinced that the economy will accelerate "through 2013," and start to again close the gap in what it is now calling "material excess capacity" (again, a little more bearish language than it used previously).

And where does the bank see this economic acceleration coming from? The most intriguing source it cites (and it lists it first, which is probably no accident) is "modest growth in household spending."

This is the same central bank that spent a big chunk of last year telling us that households needed to tighten their belts and address their ballooning debt levels – indeed, the looming threat of higher interest rates served as a weapon to help convince Canadians it was serious. But now, after a downturn in the residential real estate market and a palpable slowdown in household debt growth, the bank seems confident that households, rejuvenated from their spending constraints in the second half of last year, will find their way to unleash some pent-up demand.

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David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @ParkinsonGlobe.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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