The Bank of Canada held its key monetary policy interest rate at 1.25% this morning, as widely expected. The statement released with the decision had a hawkish tone, suggesting the next rate hike is not far off.
Economic developments since April are seen as in line with the Bank’s view, albeit for the first half overall, given an expected Q1 outperformance. Housing activity is expected to improve as the year continues, helped by rising incomes. The Bank sees consumption continuing to play an important role, suggesting that household finances are not (in their estimation) particularly pinched by recent rate hikes.
Beyond our borders, some upside is seen for the U.S., but trade policy uncertainty remains a dampening factor. Emerging market stresses were also highlighted, while recent oil price moves were characterized as driven by geopolitical developments.
On the inflation front, there is little to get excited about. The Bank expects inflation to exceed its earlier forecasts due to gasoline prices, but reminded us that, as usual, they will look through this transitory factor.
All told, the positives seem to outweigh the negatives. Gone was the reference to “caution” that typified the last few statements. Today’s statement instead chose the term “gradual” to describe the approach to policy adjustments. Importantly, interest rate sensitivity and the evolution of economic capacity remained areas of particular focus.
Key Implications
No surprise here. With the economy set to outperform the Bank’s earlier expectations (Q1 GDP data is released tomorrow morning) and signs of life in all sectors bar housing, economic conditions favour another interest rate hike. While we may need a grammarian to distinguish between “cautious” and “gradual”, the message was nevertheless clear: get ready for another rate hike.
Indeed, even more explicit than the adjective change was the dropping of the qualifier “over time” in regards to higher rates, and the only reference to labour markets was expectations for ‘solid’ income growth – gone are concerns about potential slack. This reinforces our view that as the economy continues to perform well into the middle of the year, the Bank will have the confidence it needs to raise its policy interest rate at its next scheduled decision, this July.
