Bank of Canada to make rate decision, offer fresh forecasts as economy improves

The Bank of Canada building is pictured in Ottawa on September 6, 2011. (THE CANADIAN PRESS/Sean Kilpatrick)

OTTAWA -- The Bank of Canada will release new projections Wednesday and deliver an interest rate announcement amid a backdrop of surprisingly hearty data suggesting the economy is building momentum.

Analysts, who widely anticipate governor Stephen Poloz to leave the benchmark rate of 0.5 per cent unchanged, will sift through the commentary for insight into the bank's thinking as it comes under increasing pressure to acknowledge the more positive economic figures.

The better-than-anticipated data in recent months has already led some experts to predict the central bank's next rate hike will come sooner than they previously expected.

However, observers say Poloz has made a point of emphasizing the pockmarks of the Canadian economy.

"It would be odd to forget about all those downside risks just because a couple of data points came in a little bit better than expected," Poloz said last month when asked whether the stronger numbers in areas such as growth, trade and the labour market had altered the bank's thinking ahead of the policy decision.

"We've had positive data points in the last three years, too -- and they didn't last. So, we're being very cautious in that outlook."

Economists like Jimmy Jean of Desjardins expect Poloz to once again underline some of the weaker data points -- from the numbers for non-energy exports, to hours worked, to wage growth.

Jean said the bank should consider elaborating Wednesday on these arguments, particularly as the bank proceeds with more caution than what a lot of people think is warranted.

"To their defence, there are some areas in the data that are perhaps more lacklustre," said Jean, who is a senior economist with Desjardins.

"Now, at the same time ... there's no dancing around the fact that the economy has outperformed expectations, including their expectations."

Frances Donald, senior economist for Manulife Asset Management, said she expects Poloz to emphasize that inflation -- the bank's primary concern -- has been trending downwards as an argument in favour of not touching the interest rate.

"We've seen some data do a little bit better," Donald said.

"But the crux of this economy is certainly not overheating and there are many parts of the economy that are still suffering."

To complicate matters further, the rate decision and the fresh projections will arrive amid significant uncertainty linked to trade and tax changes under discussion in the U.S. They include the renegotiation of the North American Free Trade Agreement, corporate tax cuts in the U.S. and a potential border tariff.

Poloz has declined to factor in the impacts of any U.S. proposals into the bank's outlook before they are announced.

In January, he said the unknowns surrounding the U.S. trade agenda, along with what was then the sluggish state of the Canadian economy, had left the door open to a possible rate cut.

When asked in Oshawa last month if lowering the rate was still under consideration, Poloz replied that there were "important potential downside risks that we need to keep on the table until they're clear."