Stephen Poloz, Keynesian

As expected, the Bank of Canada kept its key reference rate unchanged at 0.5 percent after today's policy meeting.  The Bank also released its latest quarterly Monetary Policy Report.  As Governor Stephen Poloz's remarks in tabling this report make clear, the Bank sees the recent Federal budget making a significant contribution to GDP growth in the current year and beyond.

Despite some strong data in recent days (see previous posts), the Bank remains uncertain over the underlying strength in the Canadian economy.  Given the collapse in investment intentions in the resource sector (notably oil),  it has lowered its estimate of the economy's potential growth rate (a slippery concept, it should be said) to just 1.5 percent per annum, from 1.8 percent previously.  There are also signs that the Bank is already beginning to fret that the rebound in the exchange rate could soon start to have a deleterious effect on growth.

Given these negatives, the stimulus that the Bank sees coming from the fiscal side looms large. Indeed, the Bank expects this Keynesian stimulus will more than outweigh the three main headwinds facing the domestic economy -- weak resource investment and the strengthening dollar, as already noted, plus the latest downward revisions in the global growth outlook.  As a result it has revised its short-term GDP growth outlook modestly higher, to 1.7 percent this year and 2.3 percent in 2017.  These numbers are slightly above the recent IMF forecasts, and massively above the deliberately lowball forecasts used in the budget itself.

These growth numbers are above the potential growth rate as the Bank now sees it, which means that the so-called output gap (between actual and potential GDP) is likely to close somewhat sooner than previously expected.  Even so, the Bank does not expect the output gap to disappear before the end of 2017.  Unless the inflation rate surges unexpectedly (unlikely,  but not impossible as the impact of the weak exchange rate continues to make itself felt) it appears that the Bank will feel comfortable keeping its policy settings as they are for at least one more year.

Lastly, a linguistic quibble.  Gov Poloz states that the Bank does "a fulsome review" of Canada's economic potential every year.  "Fulsome", a word usually found next to the word "praise", means "overblown and insincere". I don't think that's what the Guv meant; "thorough", perhaps?  I'm seeing this particular piece of bad usage quite regularly in the media these days.  Enough, already!