BoC: A more hawkish stance - NBF

At today’s meeting, the Bank of Canada raised the key rate to 1.75%. According to National Bank of Canada’s analysts, Krishen Rangasamy  and Paul-André Pinsonnault, the central bank opened doors for faster policy normalization.

Key Quotes:

“The BoC also pointed out that since the economy is now running close to its potential, it no longer needs policy stimulus and hence the overnight rate will need to rise to neutral in order to achieve the inflation target. Senior Deputy Governor Wilkins reiterated that the Bank estimates neutral to be in a 2.5 to 3.5% range. Risks to the global economic outlook related to the U.S.– China trade tensions were also discussed. But Governor Poloz pointed out that related risks to the economy are not all to the downside because there could also be a negotiated de-escalation of those tensions. The BoC also acknowledged that for some households, the adjustments to higher interest rates will be difficult. Still, as long as higher rates reflect a stronger economy, rate hikes should be seen as good news.”

“The Bank of Canada’s statement was more hawkish than the one it published last September. The central bank not only raised interest rates (which was expected by markets), but it also dropped its reference to “gradual” rate hikes. That could mean a more aggressive path to monetary tightening than what was expected previously.”

“The BoC’s more hawkish stance is based on largely positive economic data and reduced trade-related uncertainties courtesy of the USMCA trade deal. At this point we’re calling for three more rate hikes before year end-2019, which would then put the overnight rate in the lower end of the estimated neutral rate. Going much further than that would, in our view, threaten the growth and inflation outlook in light of the economy’s sensitivity to rate hikes.”