Poloz Changes Tune to Signal Canada’s Recovery Isn’t So Intact

  • Bank of Canada says downside inflation risks have increased
  • In rate decision, Poloz casts doubt on recent GDP forecasts

Just as things seemed to be turning around, Stephen Poloz is dialing back the certitude on Canada’s economic recovery.

The Bank of Canada Governor switched gears Wednesday, saying risks to the inflation profile had “tilted somewhat to the downside” in the eight weeks since the central bank’s last set of forecasts. That’s a departure from previous statements that described inflation risks as “roughly balanced,” and calls into question his long-standing view that exports, particularly in non-commodity industries, would lead the country out of its malaise.

“Until now, the BoC has appeared to be somewhat strident in its defense of expectations for an export recovery,” Derek Holt, Scotiabank’s vice-president of economics in Toronto, wrote in a research note. “One can question what took it so long to change its tune -- and why it did so after the first gain in export volumes in six months -- but the shift toward recognizing how terribly weak exports have been is welcome nonetheless.”

Back in July, Poloz rebuffed questions at a press conference about flagging exports by pointing to a chart -- the infamous Chart 6 -- in his forecast paper, which showed real exports increasing sharply through 2018. Economic indicators over the last week appeared to ratify his view: the economy expanded in June by the most in almost three years, and July exports surged.

Lost Ground

Instead, the Bank of Canada statement Wednesday that accompanied its decision to hold rates steady at 0.5 percent said “ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated in July.”

Exports disappointed even after accounting for weaker investment in the U.S., resource-sector adjustments, and cutbacks in auto production, according to the statement. That suggests the central bank “has no idea why exports are underperforming so much, lowering their confidence in the outlook,” Charles St-Arnaud, a senior economist at Nomura International Plc in London, said in an e-mail.

The bank that targets 2 percent inflation also used the statement to weigh in on price gains that haven’t exceeded that goal for almost two years. Again that shift comes after policy makers boosted their inflation forecast in July.

So what changed?

Canada’s economy contracted in the second quarter by the most since 2009 as Alberta wildfires curbed oil production, and weak global demand and lower commodity prices prompted businesses to cut spending.

“That was the biggest change potentially for them, was a realization that first-half growth was a little lower than expected,” Steve Locke, head of fixed income at Mackenzie Investments in Toronto, said by phone from Toronto. He oversees about $12 billion in assets. “It’s kind of like a baby step toward dovishness.”

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