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BOC monetary policy decision: Assessing future bias

Bank of Canada (BOC) as expected, increased interest rates by 25 basis points after signaling such a move since early June.

But how the bank is planning for future?

Let’s asses the bias in the monetary policy statement.

BOC has increased its overnight rate to 0.75%, Bank rate to 1.00% and deposit rate to 0.5%.

  • BOC acknowledges that recent data boosted the bank’s confidence in above-potential growth and absorption of excess capacity in the economy. The bank judges the softness in inflation to be a temporary one. The lag between monetary policy actions and outlook on future inflation prompted the bank to increase rates. (Neutral Bias)
     
  • BOC acknowledges that global economic growth becoming stronger and broadening across countries and regions. Growth in U.S. has been weak in the first quarter but the economy now growing at a solid pace. Above-potential growth is becoming more widespread in the euro area. However, Geo-political uncertainties clouds outlook, especially for trade and investments. Oil price moved lower looking for new supply/demand balance.  (Mild hawkish Bias)
  • Canada’s economy robust, fuelled by household spending that absorbed significant amount of economic slack. The very strong growth in the first quarter is expected to moderate over the balance of the year, but remain above potential. Growth is broadening across industries and regions, thus becoming more sustainable. As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding. Household spending will likely remain solid in the months ahead, supported by rising employment and wages, but its pace is expected to slow over the projection horizon.  Exports likely to make an increasing contribution to GDP growth along with business investments. (Hawkish Bias)
  • The output gap will close by year-end, earlier than the central bank’s April estimate. GDP growth expected to moderate from 2.8 percent in 2017 to 2 percent in 2018 and 1.6 percent in 2019. (Neutral bias)
  • CPI inflation softened in recent months and the Bank’s all three measures of core inflation remain below 2 per cent. The factors behind soft inflation appear to be mostly temporary, including heightened food price competition, electricity rebates in Ontario, and changes in automobile pricing. As the effects of these relative price movements, fade and excess capacity is absorbed, the Bank expects inflation to return to close to 2 percent by the middle of 2018. The Bank will continue to analyze short-term inflation fluctuations to determine the extent to which it remains appropriate to look through them.  (Hawkish Bias)

With monetary policy wordings, turning more hawkish, we expect the Bank of Canada to increase rates further over the next six months. The Canadian dollar is currently trading at 1.275 against the dollar.

 

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