BOC monetary policy decision: Assessing future bias

Bank of Canada (BOC) at yesterday’s meeting raised the rates by 25 basis points (bps) to 175 bps. This is the fifth rate hikes since 2017. The overnight lending rate is at 175 bps, the bank rate is at 200 bps and the deposit rate is at 150 bps.

But how the bank is planning for the future?

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

• The global economic outlook remains solid. The US economy is especially robust and is expected to moderate over the projection horizon, as forecast in the Bank’s July Monetary Policy Report (MPR). The new US-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment. However, trade conflict, particularly between the United States and China, is weighing on global growth and commodity prices. Financial market volatility has resurfaced and some emerging markets are under stress but, overall, global financial conditions remain accommodative. (Mild hawkish bias)
   
• The Canadian economy continues to operate close to its potential and the composition of growth is more balanced. Despite some quarterly fluctuations, growth is expected to average about 2 percent over the second half of 2018. Real GDP is projected to grow by 2.1 percent this year and next before slowing to 1.9 percent in 2020. (Neutral bias)
   
• The projections for business investment and exports have been revised up, reflecting the USMCA and the recently-approved liquid natural gas project in British Columbia. Still, investment and exports will be dampened by the recent decline in commodity prices, as well as ongoing competitiveness challenges and limited transportation capacity. The Bank will be monitoring the extent to which the USMCA leads to more confidence and business investment in Canada. Household spending is expected to continue growing at a healthy pace, underpinned by solid employment income growth. Households are adjusting their spending as expected in response to higher interest rates and housing market policies. In this context, household credit growth continues to moderate and housing activity across Canada is stabilizing. As a result, household vulnerabilities are edging lower in a number of respects, although they remain elevated. (Hawkish bias)
   
• CPI inflation dropped to 2.2 percent in September, in large part because the summer spike in airfares was reversed. Other temporary factors pushing up inflation, such as past increases in gasoline prices and minimum wages, should fade in early 2019. Inflation is then expected to remain close to the 2 percent target through the end of 2020. The Bank’s core measures of inflation all remain around 2 percent, consistent with an economy that is operating at capacity. Wage growth remains moderate, although it is projected to pick up in the coming quarters, consistent with the Bank’s latest Business Outlook Survey.  (Mild Dovish bias)
   
• Given all of these factors, the Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target. In determining the appropriate pace of rate increases, the Governing Council will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt. In addition, we will pay close attention to global trade policy developments and their implications for the inflation outlook. (Hawkish bias)

There have been changes in both languages and tone. The tone has tilted to slightly hawkish, which suggests that the central bank is nearing a neutral stance but wordings strongly suggests that another rate hike is very much likely before the second half of next year. No further rate hike is likely this year.

The Canadian dollar is currently trading at 1.305 per dollar.