This morning's Bank of Canada policy statement reads like a document from the desk of Eeyore. In short, the recent sunny data are just a brief break in the rain clouds – don't get seduced into putting away your umbrella.
The central bank made it clear that its outlook for Canadian economic growth and inflation hasn't been swayed one iota by the recent upturn in the country's disturbingly low inflation (up 1.5 per cent year-over-year in January, the third straight increase and more than double the pace of three months earlier) and gross domestic product (up at a 2.9-per-cent annualized rate in the fourth quarter, the fastest pace in more than two years).
The statement noted these "slightly" better-than-expected results, then quickly dismissed them as essentially insignificant. Indeed, the bank's tone has become even less certain and definitive than it was in its previous statement in January.
On economic growth, the bank hasn't been budged from its forecast of GDP rising about 2.5 per cent this year – and it cautioned that the first quarter is "likely to be softer." While the January statement indicated that the bank expected the economy to return to full capacity in two years, this new statement makes no mention of this timetable.
On inflation, the central bank is being even vaguer about inflation's return to its 2-per-cent target than it was in its January statement – and, depending on your read, perhaps even more pessimistic. Back then, the bank said it expected to return to target "in about two years." Now, it's saying that inflation is likely to remain "well below the 2-per-cent target this year" – without elaborating on when it expects to reach the target.
The statement leaves a couple of clear impressions. First, the Bank of Canada wants to play down any market expectations fuelled by the recent economic data. It clearly doesn't want anyone thinking those numbers have made earlier rate hikes more probable – the kind of thinking that could put upward pressure on lending rates and the Canadian dollar and create undesired headwinds for a still-fragile recovery.
Second, the absence of specific references to the bank's two-year time frame to return to full capacity and the 2-per-cent inflation target is no accident: It implies that the Bank of Canada has grown less certain about that outlook. Perhaps the better-than-expected data have contributed to this new waffling, but the language in the statement suggests the bank may be more concerned about risks to the downside than the upside.
As the statement noted, global financial markets, particularly emerging markets, have become more volatile. The tensions in Ukraine have created a new geopolitical risk to global stability. Toss in the fact that we have seen some disappointingly sluggish (though probably winter-weather-impaired) economic data recently from the United States – which the Bank of Canada is still counting on to lead the economic charge among developed economies this year – and you have a pretty good case to explain the central bank's new reticence.
Still, any way you slice it, this was not the more upbeat statement that Canada's recent economic numbers might have justified. It seems the Bank of Canada wants us looking at the dark clouds, not the silver linings.