BoC: Summertime tightening - NBF

Analysts at National Bank Financial, notes that despite downside risks to the Canadian economy, GDP growth remains robust as at this point, Q2 growth is tracking towards 3% (or better), pushing nation-wide output further beyond potential.

Key Quotes

“The closely-watched LFS data have softened compared to last year, but Canadian payroll employment gains are sturdy enough.”

“Core inflation may not be screaming higher (the Bank’s three preferred measures are clustered in/around the mid-point of the target band), but all-items inflation is sitting at a sixyear high, while labour shortages, related wage gains and earlier C$ weakness hint at a build-up of price pressure.”

“All in all, it’s a picture of economic resilience. So no, Canada shouldn’t be maintaining negative real interest rates at this stage of the cycle.”

“More BoC rate hikes to come then… we’re agreed. The real issue is the optimal/likely timeline of those hikes, and how our monetary policy stacks up vs the Fed. We’ll lean against that September 5th BoC hike some have postulated. Waiting till October 24th could provide Poloz and Company welcome clarity on two key issues: fiscal policy and trade policy.”

“Whether the Bank of Canada’s next hike comes in four weeks or two-and-a-half months, the removal of monetary accommodation will keep the front end of Canada on the defensive, particularly whilst we’re digesting a wave of international selling of our bonds (that Saudi story again). But should the BoC be out-tightening the Fed on a sustained basis… given Canada’s more pronounced rate sensitivity (a by-product of our more heavily indebted households) and the much less supportive fiscal impulse north of the border (which means fewer net bonds to digest relative to the US)? The answer: no. Today’s 50 bp overnight interest rate differential should be at least as wide, quite likely wider, over the medium term as Canada’s overnight rate settles towards the low end of the BoC’s 2.5-3.5% neutral range.”