Bank of Canada monetary policy preview

Today Bank of Canada (BoC) is to provide further guidance in policy meet. The result of the monetary policy meeting is scheduled to be announced at 14:00 GMT, followed by a press conference with the governor at 15:15 GMT.

Current policy measures–

• BoC is maintaining overnight deposit rate at 0.5 percent.
   

The core objective of BoC monetary policy is price stability which means keeping inflation within a range of 1-3 percent. The headline inflation is currently at 1.3 percent, it has been showing lots of volatility lately.

Economy at a Glance:

• Canada is a very small economy of $1.55 trillion approximately, compared to its larger neighbor, the United States.
• Canada suffered technical recession last year as GDP contracted in both first and second quarter of 2015. As of December 2015, annual GDP growth rate has dropped to 0.3 percent from 3.1 percent two years ago. However, it has bounced to 1.1 percent in the first quarter of last year. In the second quarter, the economy shrank by 0.3 percent, only to recover by 0.9 percent in the third quarter. In the fourth quarter, GDP grew by 0.6 percent. In the first quarter of this year, growth has rebounded strongly with 0.9 percent on a quarterly basis and 2.9 percent annualized rate.
• The unemployment rate is currently at 6.5 percent, still, higher than its long-term average.
• The Canadian housing sector has come under strain in recent times after big price rises in previous years.

Return of growth in the US is expected to help the Canadian economy as a whole. However, President-elect Donald Trump’s trade policies could pose concerns, along with policy uncertainties.

What to watch out for –

In recent weeks, especially since early June, BoC policymakers, especially Governor Stephen Poloz stepped up the hawkish rhetoric and suggested that the possibility of a hike remains in play at today’s meeting.

It is very much likely that there will be a hike of 25 basis points. Since a hike today is well expected, the focus will be on commentaries to understand that future path/pace of hikes.

Impact:

Since BoC’s suggestions in early June, the Canadian dollar has strengthened from 1.35 per dollar to 1.291 as of today. So the financial market has well priced a hike. So if a hike is not delivered today, the loonie is likely to weaken sharply. In case there is a hike along with dovish comments on future outlook could see the loonie rise initially but decline eventually on profit bookings.