BoC: More optimistic, but hikes still seen a year - HSBC

Bank of Canada officials signal a pivot toward greater optimism as past rate cuts have “done their job” notes David Watt, Chief Economist at HSBC.

Key Quotes

“In a speech on 12 June 2017, Bank of Canada Senior Deputy Governor Carolyn Wilkins said that the Bank will assess "whether all of the considerable policy stimulus presently in place is still required." The optimistic tone was echoed by Bank of Canada Governor Stephen Poloz in a subsequent radio interview noting that "the economy is gathering momentum," and that earlier interest rate cuts had "largely done their job.”

“The context for the Bank of Canada’s change in tone includes several factors. GDP growth has averaged 3.5% per quarter over the past three quarters. Employment gains have surprised to the upside over the past 10 months. Consumer and small business confidence have improved. Auto sales have been strong. The headwind from the decline in oil prices from mid-2014 through 2016 Q1 has faded. As well, corporate profits have rebounded as commodity prices rallied, leading to firms feeling more confident about investment. Accordingly, Bank of Canada arguments to maintain a cautious tone on the economy, and leaving open the option that rates might be cut again became much less powerful. Indeed, no longer is the debate whether the Bank needs to lower rates again, instead, the issue is when the Bank might need to hike rates.”

“We do not think that the Bank is necessarily in any hurry to raise rates. To us, the conflicting signals from the job market, soft underlying inflation, weak non-energy exports and the overleveraged household sector will keep the Bank on hold. Though short-term interest rate markets have moved to price in at least one rate hike before the end of 2017, we see this as premature and still see the first Bank rate hike delayed until 2018 Q4.”

“With weak exports and business investment, other sectors, such as consumption and residential investment, have been key drivers of GDP growth. To maintain spending, already over-leveraged households have resorted to increasing borrowing and saving less. The higher the initial value of the debt-to-GDP ratio, the greater the risk that a monetary policy intervention could prove destabilizing in the short run, in our view. We expect GDP growth of 2.4% (up from 1.7%) in 2017 and 1.7% in 2018, compared to consensus expectations of 2.5% and 2.0%, respectively.”