Bank of Canada left the policy rate unchanged at 0.5% in May. Canadian dollar rallied to a 1-month higher against the US dollar after the announcement. Although the decision had been widely anticipated, traders were thrilled as policymakers acknowledged the strength in both global and domestic growth developments. The central bank also noted its expectations of ‘very strong growth in the first quarter’. Yet, the abovementioned hawkishness was offset by concerns over subdued wage and price growth, leaving the overall statement neutral.
In the short post-meeting statement, policymakers indicated that the global economy continued to ‘gain traction’ and recent developments reinforced the view that ‘growth will gradually strengthen and broaden over the projection horizon’. Acknowledging the slowdown in the US, Canada’s biggest trading partner, in the first quarter, BOC attributed it to ‘temporary factors’ and remained confident over ‘a rebound in the second quarter’.
Domestically, policymakers noted that the ‘adjustment to lower oil prices is largely complete’ and acknowledged the ‘encouraging’ economic data released of late. The central bank pointed to the improvement in the indicators of business investment, consumer spending, the housing sector, as well as the employment market. The BOC remained concerned over the strong property price, indicating that the macro-prudential and other policy measures have not yet contributed to a substantial cooling effect on housing markets. Meanwhile, the central bank suggested that the very strong export growth in the first quarter would be followed by some moderation in the second quarter.
On inflation, BOC noted that the continuous decline in food prices was mainly driven by ‘intense retail competition’. Policymakers also pointed that the central bank’s three measures of core inflation remained below +2% whilst the subdued wage growth was consistent ‘with ongoing excess capacity in the economy’.
We expect the central bank leave the policy rate unchanged or the rest of the year. Yet, should the strong growth in recent quarters translate into inflationary pressures, the BOC would be more motivated to begin hiking interest rates.
