Poloz Speech: Gradual is still the name of the game - TDS

Analysts at TD Securities explained that BoC Governor Poloz used his speech today to revisit a few favourite themes.

Key Quotes:

The benefits of creative destruction (particularly as it pertains to the digital economy), the merits of data dependence, and the need to lift rates gradually."

"The speech was largely consistent with recent remarks from the Bank."

"Data dependence is still the Bank's motto, and the Governor did reiterate that the path will be towards higher rates."

"While the Governor used the opportunity to remind markets that they will take a gradual approach, an October rate hike still looks very likely following this speech."
 
"Governor Poloz spoke today on the topic of "Technological Disruption and Opportunity". Creative destruction as been one of the Governor's favorite topics throughout his tenure, and he used the speech to evangelize on the benefits of globalization and automation. Consequently, the tone of the speech was generally positive, with the Governor arguing that Canada stood to benefit from "digital disruption" and citing job vacancy figures to argue that technological change was creating opportunities (he then argued that more needed to be done to help workers retrain). None of this is terribly controversial or terribly surprising - the Governor's remarks in Jackson Hole made it clear that the digital economy is a particular point of interest for him."

"Moreover, the Governor's comments monetary policy were consistent with previous pronouncements. He noted that the BoC's models put the economy at full capacity which was consistent with core inflation metrics, but in the same breath he cautioned that the forecasts were inexact. He argued that the Bank could not conduct monetary policy mechanically, citing uncertainties high household debt levels, new mortgage lending guidelines, and uncertainty around international trade policy."

"None of those arguments are new from the BoC, nor was the argument that "new digital technologies are making it harder to accurately measure the components of supply and demand." The Governor's conclusion, as always, was that the BoC needed remain data dependent, and that the correct path for the Bank was to take a gradual approach to raising interest rates."

Look For a Hike in October

"With the output gap closed and the overnight rate at least 1.00% below its neutral rate, the path for the BoC is still clearly towards higher rates - the fact that the Governor's laundry list of economic uncertainties had a dovish tilt to it just implies that they will maintain their gradual approach. If the uncertainty surrounding the economy were to disappear we would expect to see rates rise at a faster pace. Recent economic activity more than justifies a rate hike in October, and we would need to see a material deterioration in the outlook to prevent a follow up hike in the first half of 2019."