As widely anticipated, the Bank of Canada held its key monetary policy interest rate at 1.25% this morning. The accompanying statement struck a dovish tone.
Global growth is seen as solid, and U.S. policy changes are expected to boost U.S. growth this year and next. It was also noted however that trade policy developments are an ‘important and growing source of uncertainty’
Turning to Canada, the overall level of output is seen as in line with their expectations despite a softer than anticipated end to last year. The gain in imports was attributed to stronger business investment, adding to economic capacity. Housing is the wildcard, and the Bank sees the strong performance in the fourth quarter as representative of a pull-forward of demand. The impact of policy changes will take time to assess. The statement also noted that household credit growth has decelerated for three consecutive months.
On inflation, the statement noted an overall pace close to 2% and the further gains in the Bank’s core measures, pointing to an economy operating near capacity, although temporary factors are having an impact particularly on the headline measure. On wages, the Bank continues to view the current pace as lower than typical for an economy with no labour market slack.
Ultimately, the Governing Council remains of the view that higher rates will be warranted over time, but will continue to assess the economy’s sensitivity to interest rates, economic capacity, and wages/inflation.
Key Implications
Given the developments since January, anything that wasn’t dovish would have been a surprise. The economic outlook may be positive, but with trade risks mounting and the economy in the middle of an adjustment to yet another round of measures to cool housing markets, a ‘wait and see’ approach is clearly appropriate. Now is not the time to rock the boat.
As the statement pointed out, ultimately rates are likely to rise further, but with time needed to assess the impacts of both domestic policy changes and external developments, we remain of the view that the July meeting is the most likely to see the next move.
Of note, this decision marks the start of a new communications approach from the Bank of Canada. Deputy Governor Tim Lane will provide an ‘economic progress report’ tomorrow that should hopefully provide more insight on how the Bank is assessing recent developments.
