Our Take
The Bank made a subtle change in today’s statement having maintained the overnight rate at 0.5% but stipulating that the degree of policy support remains appropriate "at present".
The tone of the Bank’s assessment appears to be more upbeat as policymakers gave a nod to both global and domestic conditions having improved with the Bank anticipating "very strong growth in the first quarter". Moderating this enthusiasm was the persistence of subdued wage growth and core infla- tion measures remaining below 2%.
There have signs that the economy built a good head of steam over recent quarters and that the hand off to the second quarter was solid. Hours worked recovered in April and an alternative measure of wag- es showed growth averaged closer to 2% in recent months. Our monitoring of the data points to growth in the economy having strengthened with real GDP growth topping 4% in the first quarter driven by on- going household spending strength and a recovery in business investment.
While current conditions were viewed more positively, the Bank continues to be concerned about the uncertainties associated with US economic policy and specifically cited competitiveness challenges faced by Canadian exporters. The Bank said recent regulatory changes have not yet resulted in a "substantial cooling" in housing market activity. We expect that the rule changes to be sufficient to slow housing market activity but as long as expectations for rates to remain low persist, the risks is that hot markets will stay on a slow burn and do not expect consumer spending growth to weaken significantly. With business investment picking up in the first quarter, the opportunity for the Bank to shift the drivers of growth away from the financially extended consumer may be in the offing. The Bank acknowledged that the current degree of monetary policy support is needed today, however should the economy continue along this stronger growth path, we think it likely the Bank will shift away from its neutral stance and maintain our view that the Bank will be in position to raise the overnight rate in the first half of next year.
