Highlights:
- The overnight rate was held steady at 1.50% today following an increase in July.
- The bank dismissed the recent increase in headline inflation and expects CPI will move closer to 2% early next year when the impact of higher energy prices has faded.
- Wage growth was described as moderate—the bank has often cited that as evidence of some lingering labour market slack—though policymakers think the economy has been close to full capacity for some time now.
- The bank reiterated that higher interest rates will be warranted and rate increases will be gradual and data dependent.
Our Take:
Economic data over the summer were strong enough to warrant some speculation that we’d see a repeat of last year’s back-to-back July-September rate hikes. But markets only ever flirted with the idea, and the combination of an even-keel tone from Governor Poloz and an on-consensus Q2 GDP report had us expecting little from today’s meeting. The bank delivered on that with no rate change and a policy statement that was in keeping with Poloz’s comments at Jackson Hole. The bank gave themselves a well-deserved pat on the back noting the economy is “evolving closely in line” with their July forecasts. Headline inflation has been stronger than expected, hitting the top of the BoC’s target band in July, but that was once again attributed to transitory factors (largely airline fares). The bank is taking comfort in core inflation readings that have been steady at 2%, consistent with an economy that has been operating near capacity “for some time.” Overall they sounded pleased with recent economic developments. The long-awaited rotation toward exports and business investment is proceeding, even as trade uncertainty hangs over the outlook. Higher rates and regulatory changes have weighed on housing and consumption, but housing markets are stabilizing and household indebtedness is moving in the right direction.
In a statement with few surprises, the one change in language that stood out was in the final sentence: the bank is “monitoring closely the course of Nafta negotiations and other trade developments.” Governor Poloz has been adamant that monetary policy would not be headline dependent but rather influenced by actual trade actions and the impact of uncertainty. We doubt today’s statement marks a shift in that thinking. But we’ll certainly be watching Senior Deputy Governor Wilkins’s comments tomorrow for any hints that growing trade tensions are weighing more heavily on the policy outlook. We think the BoC’s next Business Outlook Survey will be more important in their October deliberations than Nafta headlines. And barring an unexpected deterioration in business sentiment—or dissolution of Nafta—we think an October rate increase remains on track.
