It is not often that a central bank comes clean with respect to how quickly the world has changed, but in the case of the Bank of Canada, the shift in policy emphasis seems quick dramatic. Today, the Bank announced no change in its bank rate, set in October, at 1 ¾%. That, in itself, came as no surprise to anyone who has kept abreast of the spade of economic data released recently. We have witnessed a slowdown in virtually all major sectors; especially hard hit has been new residential construction, business investment, energy production and manufactured exports---- in the essence, the bedrock of the economy.

Parsing the Bank’s statement today, we see a major retreat, as the Bank noted  that  “recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had forecast in its January Monetary Policy Report (MPR)”The Bank clearly recognizes that there are “trade tensions and uncertainty[that] are weighing heavily on confidence and economic activity” Simply put, Canada is a trading nation with more than 25% of national income derived from global trade which is struggling under a black cloud of protectionism originated in its largest trading partner, the United States.

What caught the Bank off guard was the dramatic slowdown in the fourth quarter. Employment figures did not match with the decline in national output which, no doubt, throw earlier projections off course. To the Bank’s dismay, exports and business capital investment fell well short of expectations. Adding to the national woes was a softness in retail sales and a decline in the housing market. As a result, “after growing at a pace of 1.8 percent in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January”.

Unlike the Federal Reserve, the Bank of Canada has only one policy objective, namely to maintain price stability. Reaching and maintaining an inflation rate of 2% continues to be very elusive as the core rate eased to 1.4 % in January, largely because of lower gasoline prices and a weaker consumer sector. The Bank continues to adhere to the belief that the low inflation rate is due to “temporary factors, including the drag from lower energy prices and a wider output gap “.

The Bank now recognizes that it is not able to give a confident forecast of the future when it states “it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook”. The Bank has relied on these two measures to guide their rate-setting policy and now these measures are harder to gauge than ever before.