Bank of Canada officials continue to characterize the country's economic performance as “solid,” despite a recent soft patch they believe is only temporary.
Senior Deputy Governor Carolyn Wilkins, in a Calgary speech, reiterated the main messaging from Wednesday's rate decision, where the central bank kept rates unchanged but expressed growing confidence Canada is on track for a rebound. The speech is what the central bank calls its Economic Progress Report, in which it aims to provide insight into deliberations following rate decisions not accompanied by new forecasts.
Despite pockets of weakness and trade uncertainties, the overall picture of the economy is a strong one, Wilkins said. Before being set back at the end of last year, it had been near capacity, with unemployment at historic lows, wages improving and inflation returning to around 2 per cent.
“Seen from a macro perspective,” Wilkins said, “Canada's economic performance has been relatively solid.”
“That's the perspective that we, as central bankers, need to take to meet our inflation objective,” according to her comments from a prepared text of the speech.
The comments were largely in line with the Bank of Canada narrative that there’s underlying strength in the economy, the current slowdown is likely just a “detour” and while borrowing costs are on hold for now, the next move is more likely to be a hike than a cut. It’s a view that has put the Bank of Canada at odds with investors betting growth will slow further and the central bank will likely cut.
To be sure, trade risks remain prominent and have curbed investment, said Wilkins, citing this as one of the key reasons for a recent slowdown in Canadian and global growth. It's a key reason why central bankers globally have taken a dovish turn in recent months, she said.
“Given these developments both in Canada and globally, it's no surprise that policy-makers responded,” she said.
Still, officials expect business investment to firm, particularly outside of the energy sector. Wilkins also expressed optimism about household spending and oil markets.
“Recent data suggest that investment in the non-energy sectors has started off the year in positive territory,” Wilkins said.
In the energy sector meanwhile, Wilkins said the central bank estimates investment will fall by another 20 per cent before stabilizing, after already halving between 2014 and 2016.
Here are some additional details Wilkins provided about the Bank of Canada's rate deliberations this week.
- Investment was only one of many factors that went into the announcement
- Evidence has been accumulating that the Bank of Canada's growth accelerating story is on track
- Discrepancy between strong jobs market and weak spending data can be explained “in large part” by behavior in oil and construction sectors. Facing slower sales, these companies have kept employment levels steady but cut hours
- “This is consistent with firms believing that the economy has been going through a temporary soft patch, exacerbated by the brutal winter”
- Recent inventory build-up could be a risk for later this year
- Recent natural disasters could add some choppiness to economic data
- Much of the discussions centered on household spending, oil markets and global trade policy
- Labor income is shoring up household spending, consumer confidence and retail sales have picked up and housing markets are stabilizing
- A big part of the bank's work leading up to MPR will be to understand implications of trade developments
- Pointed out the two-side risks to trade tensions but said a deterioration remains a major preoccupation for the bank
- Bank discussed recent developments in financial markets. Flattening yield curves could reflect changing tone by central banks, investor appetite for long-term assets, as well as reflections of growth prospects. “We continue to be attentive to these signals”