E Two-Handed Economists At The Bank Of Canada

I believe it was U.S. President, Harry Truman, who once said he was tired of hearing from “two-handed-economists”. It seems that at the Bank of Canada two-handed economists continue to hold sway. Not unexpectedly, the Bank of Canada announced that it will hold its policy rate at 1.25 per cent. The Bank cited several factors that, on the one hand, are positive and several factors that, on the other hand, are restraining the economy. To be fair, these are not easy times for central bankers as they try to steer a course for interest rates at a time when economic uncertainty has rarely been greater. So, it is understandable why the Bank is so cautious about rate changes in the future.

On the one hand, the Bank looks to Canadian exports to strengthen in response to what they believe will be continued growth in the international markets. On the other hand, exports will not recover, sufficiently, the ground lost during the second half of 2017. Oil exports are constrained by transportation bottlenecks within Canada and also because of large price discounts on non-conventional oil. Canada continues to run trade deficits which are expected to keep economic growth in check.

On the one hand, the Bank is somewhat buoyed by a steady increase in business capital investment, as borne out from its recent survey. This should add to capacity in key sectors and in the economy more generally. Canada lost nearly 10 per cent of its industrial capacity in the recession of 2008-9 and has been slowly recovering. On the other hand, the growth in capital formation is held back by “ongoing competitiveness challenges and uncertainty surrounding U.S. trade policies”. The Governor in his press conference noted that the “export/investment nexus” is what is hindering economic growth.

On the one hand, Bank believes the country is approaching its 2 per cent inflation target, as excess capacity is take up, signaling the possible need for higher interest rates. On the other, the volatility in energy prices and recent increases in minimum wages “will likely cause inflation in 2018 to be modestly higher … than the 2 per cent target…”. In other words, the Bank is prepared to breach the 2 per cent target, in recognition of these temporary conditions.

Print Friendly, PDF & Email

Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

Share This Post On

Submit a Comment

Your email address will not be published. Required fields are marked *