BOC monetary policy decision: Assessing future bias

Bank of Canada (BOC) at yesterday’s meeting kept the interest rate at 1.50 percent. Overnight rate is at 1.50 percent, bank rate at 1.75 percent, and the deposit rate at 1.25 percent.

But how the bank is planning for the future?

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

• CPI inflation moved up to 3 percent in July. This was higher than expected, in large part because of a jump in the airfare component of the consumer price index. The Bank expects CPI inflation to move back towards 2 percent in early 2019, as the effects of past increases in gasoline prices dissipate. The Bank’s core measures of inflation remain firmly around 2 percent, consistent with an economy that has been operating near capacity for some time. Wage growth remains moderate. Recent data on the global economy have been consistent with the Bank’s July Monetary Policy Report (MPR) projections. The US economy is particularly robust, with strong consumer spending and business investment. Elevated trade tensions remain a key risk to the global outlook and are pulling some commodity prices lower. Meanwhile, financial stresses have intensified in certain emerging market economies, but with limited spillovers to other countries. (Dovish bias and CPI is expected to drop, which should go against further hikes)
   
• The Canadian economy is evolving closely in line with the Bank’s July projection for growth to average near potential. Following growth of 1.4 percent in the first quarter, GDP rebounded by 2.9 percent in the second quarter, as the Bank had forecast. GDP growth is expected to slow temporarily in the third quarter, mainly because of further fluctuations in energy production and exports. While uncertainty about trade policies continues to weigh on businesses, the rotation of demand towards business investment and exports is proceeding. Despite choppiness in the data, both business investment and exports have been growing solidly for several quarters. Meanwhile, activity in the housing market is beginning to stabilize as households adjust to higher interest rates and changes in housing policies. Continuing gains in employment and labor income are helping to support consumption. As past interest rate increases work their way through the economy, credit growth has moderated and the household debt-to-income ratio is beginning to edge down. (Mild hawkish bias largely due to upbeat comments of the economy but those are almost similar to the last report)
   
• Recent data reinforce the Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target. We will continue to take a gradual approach, guided by incoming data. In particular, the Bank continues to gauge the economy’s reaction to higher interest rates. The Bank is also monitoring closely the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook. (Neutral bias)

The statement clearly indicates that the central bank is looking for an opportunity to move more towards being neutral, so, if the inflation comes down as anticipated, we don’t see more than just one hike taking place over the next three quarters.