BoC: No fireworks, holds overnight rate at 0.50% - RBC Economics

Josh Nye, Economist at RBC Econmics, notes that the Bank of Canada held the overnight rate steady at 0.50%, as expected, and provided little in the way of an implicit policy bias. 

Key Quotes

“Uncertainty about the global outlook was front and centre in the policy statement, particularly with regards to US policy, although the Bank’s initial assumption was that fiscal stimulus would boost US growth by ½ ppt over the next two years.  The Bank took note of tightening financial conditions, both from rising global bond yields and appreciation of the Canadian dollar alongside the US dollar―the latter exacerbating competiveness challenges and “muting the outlook for exports.”  The energy sector’s adjustment to lower prices is now seen as largely complete, although negative wealth and income effects are expected to linger.”

“The Bank’s GDP forecasts were little changed; 2.1% growth this year and next is still expected to close the output gap around mid-2018.”

“Our Take:

• The Bank of Canada continues to see the economy shifting to above-trend growth this year and next, thus gradually absorbing excess capacity and returning inflation to 2% on a sustained basis by mid-2018.  Their forecast is supported by recent improvement in economic data (better trade, employment and business sentiment were noted) and, importantly, expectations of a further boost from federal fiscal stimulus.  However, the Bank emphasized a wide confidence band around its forecasts, particularly given both upside and downside risks related to US fiscal and trade policy. 
• Even with an assumed add from US fiscal stimulus boosting growth south of the border, Canadian GDP is only expected to receive a modest 0.1 ppt lift as ongoing competitiveness challenges and tighter financial conditions provide some offset.  There are also risks around housing as higher interest rates and macroprudential policy changes weigh on the sector that has been a consistent source of growth in recent years.  How these risks evolve over the coming year will be an important determinant of the Bank’s policy bias. 
• We expect the Bank will maintain a fairly neutral stance in the near-term given the degree of slack in the economy, even amid growing evidence of the economy’s recovery from the oil price shock and sustained momentum in non-commodities industries.  We continue to expect the Bank’s next move will be a rate hike, although not until 2018.”