Bank of Canada to move more slowly in the months ahead - Wells Fargo

Today the Bank of Canada, rose the key rate by 25bp to 1.25%. Analysts from Wells Fargo expect the BoC to move more slowly in the months ahead. They are maintaining the call for one more quarter-point rate hike in the second half of 2018.

Key Quotes: 

“At its first scheduled policy announcement of 2018, the Bank of Canada (BoC) increased its overnight target lending rate 25 bps to 1.25 percent. With this increase, the BoC has lifted the overnight rate above where it was in 2015 when oil price declines caused it to cut rates twice that year. In this special report we break down the statement from the Bank of Canada and consider the likely monetary policy path for the year ahead. In short, the inflation backdrop should be adequate to justify further rate hikes, but an over-leveraged consumer and lingering worries about NAFTA will be among the key hurdles between the BOC and an untrammeled path to higher short-term interest rates in Canada.”

“Canadian GDP grew at the fastest quarter-over-quarter pace of any G7 economy in the first two quarters of 2017, reflecting less of a drag from energy-related spending as oil prices rebounded, but has since slowed. Real GDP expanded in Q3 at just a 1.7 percent annualized pace, down from a breakneck 4.3 percent in Q2. Flat month-over-month GDP growth in October disappointed expectations and gave pause to market participants anticipating a short-term rate hike.”

“BoC Governor Stephen Poloz now has to weigh staying his hand, potentially stoking higher inflation as the labor market overheats but lending support to GDP growth, or using further rate hikes to cool down the economy. Adding to hawks’ concerns are recent minimum wage hikes, such as Ontario’s increase to $14 an hour as of January 1, up from $11.60 previously – a 21 percent jump. Some Ontario Tim Hortons locations have already raised prices on their breakfast menu this year, which may signal broader price changes to come.”

“We have been (and remain) on the low-end of the consensus expectation for short-term rates in Canada. Our forecast of 1.50 percent for the overnight rate at year-end means that there is only scope for one more rate hike this year. Until the December jobs report hit the wire, we thought the timing of the first rate hike would actually be in March.”

“The BoC has shown itself to be willing to move quickly based on economic data, with its September and January rate hikes following  unexpectedly strong GDP and employment growth, respectively. These moves have resulted in a relatively fast pace of tightening since the summer, outpacing the Federal Reserve. However, we expect the BoC to move more slowly in the months ahead, especially given the concerns we have highlighted. At this point, we are maintaining our call for one more quarter-point rate hike by the BoC in the second half of 2018, while acknowledging upside risk to our forecast.”