Brazil Holds Selic Rate at 15% as Inflation Expectations Stay Elevated 
ECB Signals Steady Rates Ahead as Policymakers Warn of Inflation Risks 
Fed Meeting Sparks Division as Markets Brace for Possible Rate Cut 
RBA Signals Possible Rate Implications as Inflation Proves More Persistent 
BOJ’s Noguchi Calls for Cautious, Gradual Interest Rate Hikes to Sustain Inflation Goals 
Bank of Canada (BOC) surprised the market by increasing interest rates by 25 basis points after another 25 basis points hike at the previous meeting.
But how the bank is planning for future?
Let’s assess the bias in the monetary policy statement.
BOC has increased its overnight rate to 1%, Bank rate to 1.25% and deposit rate to 0.75%.
- BOC acknowledges that recent data boosted the bank’s confidence in above-potential growth and the growth is becoming more broad based and self-sustained. Consumer spending solid on the back of strong employment and income. Housing sector appears to be cooling on the back of tax changes and housing finance policies. The Central bank expects moderation in growth in H2 but the current growth rate is higher than the bank had expected. (Mild hawkish bias)
- Global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices. However, Geopolitical uncertainties cloud outlook, especially for trade and fiscal policies, leading to a weaker USD. The Canadian dollar has moved higher in response, which also partly reflects stronger Canadian economy. (Neutral bias)
- Though inflation is below 2 percent, it has evolved as expected. A slight increase in both headline and core inflation because negatively impacting temporary price shock dissipates. Nevertheless, there is still excess capacity in the labor market and wage and price pressure subdued compared to historical standards. (Neutral bias)
- Future rate hikes would depend on incoming data with special focus on economy’s potential, and Labor market conditions. BoC will closely monitor sensitivity of the economy to higher rates given elevated household indebtedness.
With monetary policy wordings, turning more neutral, we expect the Bank of Canada to stay put and not increase interest rates further in 2017. The Canadian dollar rose sharply following the announcement and currently trading at 1.223 per U.S. dollar.
