BoC in no apparent rush to tighten – Scotiabank

Yesterday, the Bank of Canada (BoC) policy decision left the overnight target rate unchanged at 1.00% as expected, but the meeting provided little clarity on the future course of monetary policy and while Governor Poloz reiterated that every meeting was “live” for a rate increase, markets are reining back expectations for a Dec tightening and pushing out expectations for additional hikes in 2018; it is hard to disagree with the logic at this point, explains the analysis team at Scotiabank. 

Key Quotes

“Expectations for a Dec rate hike have eased from about 50% probability before today’s policy decision to about 33% now.”  

“Markets largely took their cue from the initial flurry of headlines that hit the tape which noted that the BoC would be “cautious” about future rate hikes and expected inflation would reach 2% a little later in 2018 than previously forecast.  But there were no significant changes in the key economic data tables of the Monetary Policy Report (MPR), in fact. While real GDP is expected to moderate in H2 this year, the Bank still expects growth of 3.1% in Q4 this year and 1.7% in Q4 2018 (against 2.7% and 1.8% respectively in the July MPR).  The CPI forecasts were unchanged for Q4 2017 (1.4%) and lifted modestly for 2018 (2.1%, from 2.0%).”  

“The governor noted that the economy is operating close to potential but remarked that signs of slack remained in the labour market and professed to be more concerned with downside risks to inflation and focused on potential restraints on the economy, such as NAFTA talks and the recent strength in the CAD.  Of course, no one pointed out that one of the primary reasons for the CAD rally was because policy makers surprised the market by signaling that rate hikes were coming sooner than expected in June and following that up with successive rate increases in July and September.”

“While the read of the policy statement and MPR looks a bit more balanced than the market reaction to our mind (and the BoC did not opt for an overtly dovish message by lifting the estimated potential rate of growth in the economy), the Governor seems to be leaning towards the idea that he can allow the economy can run a little warm at least.  Some of the concerns the Governor alluded to today are unlikely to be resolved any time soon (recall that NAFTA talks will extend into 2018).  Markets are rightfully dubious about when rates will move up again.”