Bank of Canada stands pat, likely to remain on hold through end of 2018

On Wednesday, the Canadian central bank, Bank of Canada, maintained its main policy interest rate at 0.5 percent. The central bank indicated towards bolstering global economic conditions; but counterbalanced this against ‘undiminished’ uncertainty.

Recent growth dynamics are seen as being largely as the Bank of Canada expected. However, many areas of weakness were pointed out, including non-energy goods exports and business investment that ‘continue to disappoint’, and the considerable amount of economic slack that continues to be in Canada relative to the U.S., noted TD Economics.

The recent back-up in global bond yields was acknowledged from anticipation of a U.S. fiscal expansion. But the central bank did not give any additional viewpoint on implications for Canada, other than to note that Canada’s yields have risen considerably in this context, stated TD Economics.

In terms of its inflation mandate, the Bank of Canada notes that the consumer price inflation has accelerated. But they offset this with a dovish forward looking statement, noting  that core inflation is being held back by continuous slack in the economy that has been countered by past exchange rate movements that are now waning.

The Canadian central bank kept the dovish tone that has characterized its recent policy statements. In spite of an economy, which slightly outperformed their projections in the third quarter, the central bank tilted dovish by noting undiminished uncertainty and attributing the recent back-up in Canadian bond yields solely to U.S. factors, rather than domestic fundamentals.

Moreover, the traditional monetary policy guidelines are still indicating towards a dovish direction: economic slack is characterized as both considerable and persistent, with clear downside implications for core inflation in quarters ahead. The bank also re-iterated that recent macroprudential measures would work to ease housing markets. If so, this provides the central bank additional scope to ease policy if the economy considerably underperforms their expectation.

The discussion of the difference in economic slack between the U.S. and Canada sends a clear signal that it would be some time before Canada’s monetary policy tightens. The tone definitely strengthens the view that while the risks continue to be skewed towards easing, the most likely scenario is that the central bank remains on hold through the end of 2018, since they have set a reasonably low threshold on the economic forecasts, according to TD Economics.

“We expect to continue to see a dovish tone in future statements as the Bank signals to markets (as they did again today) that only evolving events will determine the direction of policy”, added TD Economics.