Bank of Canada: more dovish than ever

In Washington and in London, there is mounting criticism of central banks' dogged adherence to ultra-low interest rate policies.  More and more experts are arguing that low rate policies are setting the world up for more serious problems down the road, while doing nothing to alleviate the problems we are facing now.  It even looks as though the Brexiteers, anxious to deflect blame for the chaos they have unleashed, will use criticism of his low rate policy to turf Mark Carney out of the Bank of England and re-exert government control over monetary policy.

And then there's Ottawa.  This morning the Bank of Canada, as expected, left interest rates unchanged -- but as Governor Stephen Poloz made very clear, an immediate rate cut was certainly discussed, and remains on the table as long as the economy continues to struggle.  The Bank has yet again slashed its GDP growth forecast for the year, which is now a mere 1.1 percent -- and this despite the evidence that the third quarter of the year saw very strong growth, largely reflecting a bounce back from the Q2 slowdown resulting from the Fort McMurray wildfires.

Looking further ahead, the Bank sees GDP growing about 2 percent in both 2017 and 2018, which is slightly above its latest assessment of the economy's long-term potential growth rate. The Bank now expects the economy to reach its full potential output by mid-2018, rather than during 2017 as it previously forecast.  This seemingly pushes any thought of rate hikes back to at least 24 months from now.

The newly-announced changes in mortgage rules are expected to shave about 0.3 percent from GDP by the end of 2018, which the Bank surely sees as a worthwhile cost for limiting the risks posed to the financial system by out-of-control household borrowing. The Bank sees a rather greater impact -- 0.6 percentage points by 2018 -- from a weaker export outlook. Interestingly, it now attributes at least part of this slower outlook to "lost export capacity".  That's the old Bruce Springsteen refrain I've quoted here many times before: "these jobs are going, boys, and they ain't coming back".

So no rate cut today, but maybe one sometime in the future if things don't perk up?  Well, maybe, but it's hard to find many experts who really think that further monetary easing will make a whole lot of difference, especially if "lost export capacity" is taken into account.  We did see one positive indicator for the economy this week -- manufacturing output rose 1.2 percent in volume terms in August, well above expectations. This is further evidence that the Q3 GDP report will be a strong one, but it's evident from today's downbeat comments that the Bank of Canada does not expect that kind of performance to be repeated.