BoC Preview: Comfortably neutral

Benjamin Reitzes, Canadian Rates & Macro Strategist at BMO Capital Markets, suggests that today’s Bank of Canada policy statement brings little intrigue, as Governor Poloz and the Governing Council are comfortably neutral.

Key Quotes

“There has been lots of noise over the past month—alternative mortgage lenders, Toronto housing bubble, oil prices dropping, turbulence around Trump—none of that should immediately influence the BoC, but rather place them more firmly on hold.”

“The fundamentals continue on an improving track, with Q1 GDP growth likely to come in well above 3%, and potentially even sport a 4-handle. However, payback for that strong run and a fire-related shutdown at a major oil sands producer could weigh on March and April GDP (nearly 10% of total production was down from mid-March through April). That suggests the BoC’s Q2 projection of 2.5% growth could be meaningfully too high (we’re at 1.6%). That won’t necessarily throw off the timing of the output gap closing, an issue that we’ll deal with in July, when the Bank releases a fresh forecast in the MPR. In the meantime, look for “material excess capacity” to be repeated, consistent with their core CPI measures trending well below 2% (1.4% on average in April).”

“Governor Poloz’s biggest worry was the potential for U.S. protectionism, and that likely hasn’t changed. In fact, the turbulence surrounding the White House at present could even increase the odds of an extreme move on trade, or NAFTA in particular. Add oil’s brief dip to $45, Ontario’s moves to contain the Toronto housing bubble, and lingering concern about the alternative mortgage market, and there is plenty of uncertainty clouding the outlook and keeping the BoC on the sidelines. Expect “significant uncertainties” to be present yet again in the statement.”

“Key Takeaway: Bigger picture, little has changed for the Bank of Canada since the April policy meeting. Look for the tone of the statement to remain solidly neutral, as policymakers have no inclination to move rates in any direction for some time.”

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