Highlights:
- The overnight rate was held steady at 1.25% today after the bank raised rates in January.
- The statement noted “trade policy developments are an important and growing source of uncertainty,” a clear nod to the Trump administration’s proposed tariffs on steel and aluminum.
- Inflation developments have been consistent with the economy running at full capacity, but wage growth was once again seen as indicating a bit of labour market slack.
- The bank is keeping an eye on how regulatory changes impact the housing market, and how credit growth is responding to higher interest rates.
- Deputy Governor Lane will present an economic progress report tomorrow that should elaborate on the BoC’s latest thinking. The speech will be a regular feature following non-MPR meetings going forward.
Our Take:
Today’s statement suggests the Bank of Canada has added ‘trade policy dependent’ to their ‘data dependent’ mantra. A rate increase at today’s meeting was already a long shot, coming just seven weeks after the central bank’s last move. But any odds of a hike, or even a slightly hawkish tilt, went out the window last week with the Trump administration’s proposal to slap tariffs on steel and aluminum imports. That threat was certainly on the minds of the Governing Council when, front and center in today’s statement, they noted trade policy is “an important and growing source of uncertainty.” The BoC has been worried about the impact of Nafta uncertainty for some time and the latest rhetoric from our largest trading partner has clearly increased the odds of a negative outcome. Metals tariffs on their own won’t drastically change the central bank’s thinking. But if tit-for-tat measures escalate into a full-blown trade war—and to be clear, we aren’t nearly there yet—the BoC would have to rethink their tightening bias. The rapidly-evolving trade backdrop will be a major factor in whether the central bank raises rates in April. How businesses are responding to growing uncertainty—the bank’s next Business Outlook Survey will be released April 9—will also hold sway.
As for their data dependence, developments since January’s meeting provided little reason for the bank to deviate from their current course. We’ve seen further signs that wages and inflation are picking up. And while Q4/17 GDP fell short of their forecast, domestic demand was strong and growth remained slightly above-trend—hardly disappointing when the economy is already at capacity. Financial conditions have been mixed, with bond yields rising and equities falling since mid-January, though a weaker Canadian dollar has provided some offset. On balance, the bank’s tightening bias remains appropriate but so is a healthy dose of caution given tough talk on trade from south of the border
