BOC monetary policy decision: Assessing future bias

Bank of Canada (BOC) at yesterday’s meeting chose to keep the policy rates unchanged at 125 basis points (bps), after three rate hikes since 2017. 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 assess the bias in the monetary policy statement.

• Inflation in Canada is close to 2 percent as temporary factors that have been weighing on inflation have largely dissipated, as expected. Consistent with an economy operating with little slack, core measures of inflation have continued to edge up and are all now close to 2 percent. The transitory impact of higher gasoline prices and recent minimum wage increases will likely cause inflation in 2018 to be modestly higher than the Bank expected in its January Monetary Policy Report (MPR), returning to the 2 percent target for the rest of the projection horizon.. (Mild hawkish bias)
   
• The global economy is on a modestly stronger track than forecast in January, with upward revisions to growth and potential output in a number of major advanced economies. The outlook for the U.S. economy has been further boosted by new government spending plans. However, escalating geopolitical and trade conflicts risk undermining the global expansion. (Neutral bias)
   
• In Canada, GDP growth in the first quarter was weaker than the Bank had expected, but should rebound in the second quarter, resulting in 2 percent average growth in the first half of 2018. The economy is projected to operate slightly above its potential over the next three years, with real GDP growth of about 2 percent in both 2018 and 2019, and 1.8 percent in 2020. This stronger profile for GDP incorporates new provincial and federal fiscal measures announced since January. It also reflects upward revisions to estimates of potential output growth, which suggest the Canadian economy has made some progress in building capacity. Slower economic growth in the first quarter primarily reflects weakness in two areas. Housing markets responded to new mortgage guidelines and other policy measures by pulling forward transactions to late 2017. Exports also faltered, partly owing to transportation bottlenecks. Some of the weakness in housing and exports is expected to be unwound as 2018 progresses. (Neutral bias)
   
• The Bank anticipates that Canadian exports will strengthen as foreign demand increases, but not sufficient to recover the ground lost during recent quarters. Export growth is being increasingly limited by capacity constraints in some sectors. Continued gains in business investment should build additional capacity in those sectors and in the economy more generally. However, both exports and investment are being held back by ongoing competitiveness challenges and uncertainty about trade policies.  (Mild Dovish bias)
   
• Growth in consumption remains robust, supported by strong labour income growth. Wages have continued to pick up as expected, even after factoring out recent minimum wage increases in Ontario and Alberta. The Bank will continue to assess labour market data for signs of remaining slack. (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 in language but not n 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 first three quarters.

The Canadian dollar is currently trading at 1.261 per dollar.