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BOC monetary policy decision: Assessing future bias

Bank of Canada (BOC) at yesterday’s meeting kept policy rate unchanged at 175 bps. The central bank recently signaled pause after increased rates five times since 2017 of 25 bps each. 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.

  • Evidence has been accumulating that ongoing trade tensions are having a material effect on the global economic outlook. The Bank had already incorporated such negative effects in previous Monetary Policy Reports (MPR) and in this forecast has made further adjustments in light of weaker sentiment and activity in major economies. Trade conflicts between the United States and China, in particular, are curbing manufacturing activity and business investment and pushing down commodity prices. (Very dovish comments compared to the previous statement; dovish bias)
     
  • The policy is responding to the slowdown: central banks in the US and Europe have signaled their readiness to provide more accommodative monetary policy and further policy stimulus has been implemented in China. In this context, global financial conditions have eased substantially. The Bank now expects global GDP to grow by 3 percent in 2019 and to strengthen to around 3 ¼ percent in 2020 and 2021, with the US slowing to a pace near its potential. Escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks. (Mild hawkish bias)
     
  • The policy is responding to the slowdown: central banks in the US and Europe have signaled their readiness to provide more accommodative monetary policy and further policy stimulus has been implemented in China. In this context, global financial conditions have eased substantially. The Bank now expects global GDP to grow by 3 percent in 2019 and to strengthen to around 3 ¼ percent in 2020 and 2021, with the US slowing to a pace near its potential. Escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks. (Mild 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)
     
  • Inflation remains around the 2 percent target, with some recent upward pressure from higher food and automobile prices. Core measures of inflation are also close to 2 percent. CPI inflation will likely dip this year because of the dynamics of gasoline prices and some other temporary factors. As slack in the economy is absorbed and these temporary effects wane, inflation is expected to return sustainably to 2 percent by mid-2020. (Mild hawkish bias)

Recent data show the Canadian economy is returning to potential growth. However, the outlook is clouded by persistent trade tensions. Taken together, the degree of accommodation being provided by the current policy interest rate remains appropriate. As the Governing Council continues to monitor incoming data, it will pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation.

The Canadian dollar has strengthened to 1.305 per dollar.

The statement clearly indicates that the central bank’s reluctance to reduce interest rates despite uncertainties surrounding the Sino-American trade war. The central bank is very unlikely to reduce rates in 2019.

 

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July 2 15:00 UTC Released

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