BOC monetary policy decision: Assessing future bias

Bank of Canada (BOC) at yesterday’s meeting chose keep the policy rates unchanged at 125 basis points (bps), after three rate hikes in 2018. The overnight lending rate is at 125 bps, the bank rate is at 150 bps and the deposit rate is at 100 bps.

But how the bank is planning for future?

Let’s asses the bias in monetary policy statement.

• BoC laid out reasons for not hiking as trade policy developments of the United States are an important and growing source of uncertainty for the global and Canadian outlooks, however, it acknowledged that the global growth remains solid and broad-based and in the United States, new government spending and previously-announced tax cuts are anticipated to boost growth in 2018 and 2019. (Neutral bias)
   
• BoC notes that the economy grew by 3 per cent in 2017, in line with the projection in the Bank’s January Monetary Policy Report (MPR). In the fourth quarter, GDP growth was slower than expected, largely due to higher imports, while exports made only a partial recovery from their third-quarter decline. The gain in imports mainly reflected stronger business investment, which adds to the economy’s capacity (Mild hawkish bias)
   
• According to BoC, the strong housing data in late 2017, and softer data at the beginning of this year, indicate some pulling forward of demand ahead of new mortgage guidelines and other policy measures. It will take some time to fully assess the impact of these, as well as recently announced provincial measures, on housing demand and prices. More broadly, the Bank continues to monitor the economy’s sensitivity to higher interest rates. Notably, household credit growth has decelerated for three consecutive months. The implications of the recent federal budget for the outlook for growth and inflation will be incorporated in the Bank’s April projection. (Neutral bias)
   
• Inflation is close to 2 per cent and core measures of inflation have edged up, consistent with diminishing slack in the economy. Wage growth has firmed, but remains lower than would be typical in an economy with no labor market slack. Inflation is fluctuating because of temporary factors related to gasoline, electricity, and minimum wages.  (Mild Hawkish bias)

• The economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation. (Neutral bias)

There has been a major shift in tone. The policy statement is still slightly hawkish tilted but more neutral compared to previous statements. Due to this change, we expect the BoC to approach rate hikes cautiously in 2018; possibly only one hike in H1.

The Canadian dollar is currently trading at 1.292 per dollar.