The Conference Board of Canada’s Chief Economist Craig Alexander offers the following perspectives/insights:
“The Bank of Canada held the line on rate and stressed that their assessment of the economic and inflation risks has not changed. The implication is that monetary policy should remain unchanged this year, but bond yields could edge higher as U.S. yields rise and the Canadian dollar is likely to weaken,”
—Craig Alexander, Senior Vice-President and Chief Economist, The Conference Board of Canada.
- To no surprise, the Bank of Canada left interest rates unchanged. Accordingly, the focus was on the accompanying communique, which was very short and provided little new guidance other than the perspective that the recent rise of inflation is not a concern.
- The most notable point was a clear statement that the recent rise in inflation to above the 2 per cent target was deemed to be temporary and reflected higher energy prices partly due to carbon pricing in Ontario and Alberta. The statement was unambiguous—“The Bank is looking through these effects”. Moreover, the core measures of inflation are still pointing to material excess capacity. We agree with this assessment. Although recent job creation has been strong, the accompanying weak wage growth certainly highlights that inflation risks are low.
- The other comment that stands out is an acknowledgement that the Canadian economy likely delivered a stronger pace of growth than the Bank was anticipating in the fourth quarter of 2016. The Bank had projected 1.5 per cent growth, and it looks more likely to be closer to 2 per cent. However, the communique is clear that nothing has changed with respect to the outlook.
- The monetary authority was relatively quiet about the headwinds from the level of the Canadian dollar. Past comments about the possibility of a rate cut seemed aimed at reducing market expectations on the outlook for rates with the benefit of weakening the Canadian dollar. Today’s statement simply notes that the Canadian dollar is at levels near that at the time of the last Monetary Policy Report in January, and that report did highlight disappointment on exports and competitiveness challenges from the exchange rate. So, the Bank’s communications are still dovish, but it did not take the opportunity to be more forceful about exchange rate.
- In our opinion, the Bank of Canada is on hold for the foreseeable future. It is mindful of the risk-filled international environment, but also recognises that it will take considerable time for the slack in the economy to be fully absorbed even if the risks are not realized. Accordingly, the base case economic outlook should not require a rate cut, but tighter monetary policy is not warranted until at least mid-2018. The Federal Reserve will be raising rates this year, and the odds of a hike in March have increased. On balance, we believe this divergence in monetary policy should weaken the Canadian dollar by a couple of cents in the months ahead.