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The Bank of Canada (BoC) is expected to raise its overnight rate by 25 basis points in July, 25 bps in October, and a further 25bps inQ1 2018, thereby removing the 50bps of “insurance” that Governor Poloz implemented in 2015 and adding some insurance against upside risks as Canada’s output gap closes.
It is now believed that the BoC’s July 12 policy rate meeting is not just live but tipped toward marking the Bank’s first policy rate increase in seven years. Over the course of June, the BoC’s senior leadership has provided a cascade of statements that represent a radical shift in tone from earlier this year, Scotiabank reported.
Governor Poloz reiterated in yesterday’s interview at the ECB Forum that "those cuts have done their job" while at the same time dismissing some of his previous concerns about trade policy uncertainty and oil prices. With three opportunities to do so, it is noteworthy that Poloz did not attempt to ein in the market reaction to Wilkins’ speech, indeed he reinforced it. Today, Deputy Governor Lynn Patterson joined the chorus, noting that the "economic drag from lower (oil) prices is largely behind us".
Further, with core inflation not yet finding a clear bottom, wage growth still soft and following six years in which inflation has fallen short of the 2% inflation target, the BoC should likely proceed very cautiously. The durability of domestic growth continued frustration with export growth, a strained household sector and the risks posed by the delicate balance between markets and expectations for US fiscal stimulus all counsel additional caution.
"We express this caution in terms of capping the sum total of expected rate hikes during 2017-18 at 75bps; we allow for the removal of emergency levels of stimulus re-introduced in 2015 and add one more hike to take out tentative insurance against upside risks given the economy’s outperformance over H2 2016–H1 2017," the report added.
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