Highlights:
- The overnight rate was held steady at 1.25% for a second consecutive meeting.
- The BoC marked down their Q1 growth forecast but attributed some of the slowing to temporary factors. Activity is expected to rebound in Q2.
- Annual GDP growth is expected to be close to 2% this year and next—a slight upward revision, on balance, that reflects additional fiscal stimulus and slightly stronger potential growth.
- The bank revised up their potential growth estimates to 1.8% this year and next (previously 1.6%). Stronger estimated potential growth last year means the economy likely ended 2017 with slightly more slack than previously thought.
Inflation is expected to rise above the bank’s 2% target this year though the overshoot reflects transitory factors such as higher energy prices and the impact of minimum wage hikes. Inflation is expected to return to target next year.
Our Take:
Today’s steady rate decision was widely expected (analyst expectations close to unanimous, markets priced for only ~10% odds of a hike) but Governor Poloz still managed to land on the dovish side. The BoC’s forward guidance has been that interest rates are likely to move higher over time but policy will have to remain somewhat accommodative to counteract a number of headwinds facing the economy (competitiveness challenges, concerns about trade policy, high household debt). More emphasis on those headwinds, along with shifting goal posts for the economy’s output gap and potential growth, left the bank sounding more cautious than we were expecting.
Today’s meeting provided little clarity on when the BoC will next raise rates. Governor Poloz indicated that most of the Governing Council’s deliberations “concerned the appropriate pace of interest rate increases” but he declined to reveal whether a rate hike was discussed. The bank once again emphasized data dependence but that wasn’t fully evident in today’s comments. An upward trend in wages and inflation was only enough to increase the bank’s confidence in their tightening bias. And a positive Business Outlook Survey, flagged by Deputy Governor Lane as an “important indicator” just last month, seemed to take a backseat to the bank’s judgment on how trade uncertainty and competitiveness challenges are affecting the economy. Slower growth early this year might have provided some justification for a cautious tone, but the bank attributed much of the shortfall to temporary factors.
We still think a further increase in inflation and rebound in Q2 GDP growth will keep the Bank of Canada raising interest rates this year. But today’s emphasis on caution over data underlined downside risks to our forecast for three more hikes in 2018.
