Highlights:
- The overnight rate was raised to 1.00% from 0.75% in light of stronger-than-expected data since the last meeting in July.
- The bank doesn’t appear to be overly concerned about the Canadian dollar’s recent strength, pinning currency appreciation on USD weakness and relative strength in the Canadian economy.
- Inflation has evolved as expected with some increase in headline and core rates as economic slack is absorbed and transitory factors fade.
- The statement noted some remaining signs of labour market slack, as well as relatively slow wage growth at this point in the cycle. The latter has been observed in other advanced economies.
- The bank once again noted future rate decisions will be data dependent and close attention will be paid to the economy’s sensitivity to higher rates given elevated household debt.
Our Take:
The Bank of Canada surprised market consensus by raising rates for the second time in as many meetings, though today’s move wasn’t a total shock given strong economic data over the intermeeting period. We hadn’t heard from the bank since July’s meeting but their forward guidance that future policy changes would be data dependent, combined with last week’s robust GDP report, raised the prospect of an immediate follow-up to July’s increase. Impressive growth and additional evidence that the expansion is becoming more broadly-based—including the long awaited rotation toward stronger business investment and exports—warranted some further removal of the “considerable monetary policy stimulus in place.” At present, inflation and wage growth are not signaling an immediate need to return to a more neutral stance though that didn’t keep the bank from tightening policy at consecutive meetings. However, they continued to note future moves will be data dependent with an eye on inflation and how households react to higher interest rates given elevated debt levels. The bank is likely trying to keep markets from extrapolating the pace of rate hikes seen over the last two meetings.
We had expected the bank would hold off on another rate increase until October when its growth forecasts are refreshed. We think those projections will show the economy near capacity in Q3, though today’s indication that policymakers will have an eye on the economy’s potential growth gives them some flexibility on that front. On balance, limited economic slack, solid growth momentum, and “considerable” stimulus remaining in the system support the case for another rate hike before the end of the year. Our updated forecast for the overnight rate will be released in Friday’s Financial Markets Monthly.
