Canada: Cautious optimism - ING

James Knightley, Senior Economist at ING, notes that while acknowledging the economic and personal costs of the Alberta wildfires, the BoC remain upbeat on the prospects for growth.

Key Quotes

“The Bank of Canada left monetary policy unchanged yesterday, as widely expected, and maintained a similar positive upbeat assessment to last month’s accompanying statement. Citing encouraging economic developments in the US, rising oil prices and “accommodative” financial conditions they believe that the global economy is moving broadly in line with their projections. However, they did warn that the domestic growth story in 2Q16 will be weaker than anticipated because of “the devastating Alberta wildfires”, which led to a loss of property and a halt in oil production. This, they believe, will knock around 1.25 percentage points off 2Q16 GDP growth. However, the rebuilding work that will be required and the re-starting of oil production should lead to a strong rebound in economic activity during 3Q and 4Q16.

Inflation is currently close to the 2% target at 1.7% while core inflation is slightly above at 2.2%. We expect headline inflation to break above 2% quite soon given the ongoing increases in retail gasoline prices together with the lagged effects of Canadian dollar depreciation. In terms of the currency, they note the recent fluctuations, but state that it is close to their projections from April.

As such, there doesn’t seem to be any near-term appetite for an additional rate cut – we are probably going to need to see some fairly significant data disappointments to get any more stimulus from the BoC. As such, it is looking increasingly likely that the next move in rates is up rather than down, particularly if the US Federal Reserve hikes rates in the next couple of months since this would help to keep the CAD soft, which has been one of the main goals of the BoC to help hit the inflation target.”