Highlights:
- The overnight rate has been unchanged at 1.25% since January’s 25 basis point hike.
- The BoC acknowledged Q1 GDP appears to have been firmer than expected, but they still see growth over the first half of the year tracking close to 2%.
- They noted positive signs in exports and business investment but continued weakness in home sales. A solid labour market backdrop is expected to support consumer spending and housing this year.
- The statement reinforced the bank’s data dependence, with particular focus on household sensitivity to rising rates as well as the evolution of excess capacity (the latter is an issue they pledged to look at more closely in their July MPR).
- Deputy Governor Sylvain Leduc will deliver an Economic Progress Report tomorrow that will elaborate on the BoC’s latest thinking.
Our Take:
The Bank of Canada is no fan of forward guidance but there were certainly some hawkish signals in today’s statement that increased our confidence in a July rate hike. While much of the press release was simply a mark-to-market of recent data—with a generally positive tone—changes to the final few sentences were notable. The Governing Council’s mantra has been that they would be “cautious” in future adjustments to monetary policy, but that key word was left out today in favour of a “gradual” approach to tightening. Their bias was also strengthened by noting “higher interest rates will be warranted” without adding “over time” as they have in the past. And surprisingly there was no mention of maintaining “some monetary policy accommodation” over the medium term.
There’s certainly risk of over-interpreting changes between policy statements given the BoC’s ‘blank page’ approach to these communications (a stark contrast with the Fed). So while the odds of the next rate hike coming in July have increased, we’ll also be looking for some of the following to reinforce our expectations:
- Early evidence of growth picking up in Q2—April’s national accounts are out June 29 and along with tomorrow’s March GDP will give a good idea of the economy’s momentum in the current quarter.
- A positive Business Outlook Survey suggesting investment and hiring plans aren’t being put on hold amid uncertainty over US trade policy and slow progress in Nafta talks.
- Some stabilization in home sales and household borrowing that would indicate consumers are taking rising rates and regulatory changes in stride.
- Further evidence of core inflation running around 2% and wages growing at 3%.
