Bank of Canada on Hold After Strong Q4 GDP Print

A stronger-than-expected GDP report earlier this week combined with core inflation that is still above 2.0 percent has allowed the Bank of Canada to forego another rate cut.
Firming GDP Growth Is Giving the Bank of Canada Confidence
With a brighter assessment on economic growth from yesterday’s GDP report and core inflation that is still north of 2.0 percent, the Bank of Canada (BoC) opted to maintain its target for the overnight rate at 0.75 percent.We learned yesterday that Canadian real GDP growth came in at 2.4 percent in the fourth quarter of 2014, which was better than the expected turnout of just 2.0 percent. Not only was the fourth quarter stronger than expected, growth rates for the second and third quarter were also revised higher.The only thing that rains (snows?) on the parade for fourth quarter growth is that inventory investment was the largest contributor for the period, adding 1.7 percentage points to the overall growth rate. While we would like to see stronger growth in other areas, the inventory build in the fourth quarter follows three straight quarters in which inventory investment was a net drag on the headline number, so fretting about unintended stockpiling would be premature in our view.The inventory boost was more than enough to offset a 1.1 percentage point drag from net exports. Business spending edged slightly downward, falling at a 0.4 percent annualized rate. Consumer spending was steady, growing at a 2.0 percent clip.
One and Done?
After January’s unexpected rate cut from the BoC, we suggested that the move was “not the beginning of a rate-cutting cycle for the Bank of Canada in our view. We suspect that barring another big drop in oil prices, this will be a one-and-done event.” We have been challenged on that call in the weeks since amid a growing expectation that additional easing would be necessary as the year progresses. Indeed, a number of forecasters had penciled in another 25 basis point cut at today’s meeting.The monetary policy path is not pre-ordained and will depend on how a number of things play out, including how the U.S. economy fares when the Fed begins raising rates. Still, we maintain our initial expectation that the Canadian economy can continue to grow even amid a weak oil-price environment and that the BoC can remain on hold before eventually raising rates in 2016.Citing Canadian dollar weakness and easing financial conditions, the BoC today stated in the official statement that “risks around the inflation profile are now more balanced and financial stability risks are evolving as expected in January. At present, we judge that the current degree of monetary policy stimulus is still appropriate.