It is not easy being a central banker when events well-beyond your control interfere with your path to higher interest rates. Certainly, that is the case with the Bank of Canada’s Governor Poloz who just announced no change in the bank rate today, previously set at 1 ¾ per cent.

While the Bank takes some comfort that its prior economic projections were borne out in the third quarter, they now have to contend with a significant slowdown registered in September when GDP actually fell by 0.1 per cent. The Bank places the blame for the large decline in business investment in September on “heightened trade uncertainty during the summer”. It maintains that “business investment outside the energy sector is expected to strengthen with the signing of the USMCA” (formerly NAFTA). The Bank insists that there is “strong foreign demand” in spite of the ramifications of the very serious breakdown in China-U.S. trade relations. Just how this improved export performance comes about seems more wishful thinking than based upon realty. World trade growth is jeopardized by the tense China-U.S. trade war and the general slowdown in the advanced economies.

Rightly so, the Bank signals that “the appropriate pace of rate increases will depend on a number of factors”. In no small measure, such factors as:

• An undetermined effect of higher interest rates on household debt, consumption, and housing;
• Strained global trade relations.;
• The persistence of the oil price shock; and
• Uncertainty regarding business investment,

Any one of these major considerations can alter the future stance of monetary policy. The fact that all of them are present today makes a strong case for the Bank holding off on a rate hike.

An interesting admission in the Bank statement concerns the relationship between potential and actual growth. In previous statements, the Bank argued that the economy is near or at full capacity utilization, implying the additional growth would result in inflation. Now, the bank recognizes that “downward historical revisions by Statistics Canada to GDP, together with recent macroeconomic developments, indicate there may be additional room for non-inflationary growth”. In other words, there is no reason to suggest that without rate hikes, the economy will over-heat and produce greater inflation. Little wonder that the Bank is standing still and should do the same well into the new year.