The Bank of Canada held its key monetary policy interest rate at 1.50%, meeting market and economists’ expectations. The statement accompanying the announcement struck a slightly hawkish note, indicating that the next rate hike will be coming soon.
The economy has been shaping up in line with the Bank’s July projections, and although a slowing of growth is expected in the third quarter, the Bank attributes this to fluctuations in energy and exports (remember that their July outlook saw Q3 growth at a modest 1.5%). Importantly, the Bank sees the rotation of demand towards business investment and exports as proceeding. The statement glossed over the softer Q2 investment data, characterizing the data as “… growing solidly for several quarters.”
Beyond our borders, the U.S. economy is seen as “particularly robust”, although trade tensions remain a risk. The statement had little to say on NAFTA other than a reminder that Bank of Canada staff are closely monitoring the situation. Emerging market developments are seen as having limited spillovers.
At the core of the bank’s mandate is inflation, and it remains an unchanged story for the Bank. The recent rise to 3% is viewed as temporary, and a return to the 2% target is seen by early 2019. The statement once again characterized their core measures as pointing to an economy that continues to operate near capacity. Wage growth is considered “moderate”.
On balance, this is a fairly positive statement. The Bank again ended by noting that higher interest rates will be needed, but that a gradual approach will be taken – the same language introduced in May’s statement that presaged a July hike.
Key Implications
No surprise here. Between the tone of recent communications from the Governor and an economic backdrop that is right in line with their expectations, a hold today was to be expected.
To be sure, a hike today could have been justified given core inflation right on the Bank’s target and a still solid economic backdrop. So, why go with a ‘hawkish hold’? Waiting until the October 24th decision for the next hike has a number of benefits:
- More communication opportunities, including a new Monetary Policy Report and forecast;
- The chance to gauge (via the Business Outlook Survey) whether Q2’s soft investment performance is just a blip or a signal of something deeper; and
- Opportunity to incorporate any developments in the NAFTA renegotiation process.
That latter point is probably the key one. Barring a major shock, an October hike looks like a pretty safe bet, but after that the picture becomes murky. The Bank has been marking down its growth outlook to account for trade uncertainty – any resolution on the NAFTA front is thus likely to mean a stronger outlook, and by extension, a faster pace of hikes, all else equal.
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