Top takeaways from the Bank of Canada’s decision — and a ‘few new wrinkles’
By Pamela Heaven
Published on May 28, 2015
The Bank of Canada held its key lending rate at 0.75% Wednesday, but a fine parsing of the statement by economists revealed a “few new wrinkles.”
Keeping an eye on the loonie
No comment in the Bank’s statement attracted as much attention as this one:
“The Canadian dollar has strengthened in recent weeks in the context of higher oil prices and a softer U.S. dollar. If these developments are sustained, their net effect will need to be assessed as more data become available in the months ahead.”
Some economists saw this as a dovish turn with the Bank signalling that it might have to rethink stimulus down the line. Others disagreed, but most did think it would keep the pressure up on the loonie.
“The BoC’s note on the Canadian dollar should place a lower ceiling on the loonie further out,” wrote Nick Exarhos of CIBC Economics.
“Canadian dollar bulls only have a oil price rally as a saving hope,” said KnightsbridgeFX.com president Rahim Madhavji.
The Canadian dollar fell 0.37 of a U.S. cent to 80.10 cents after the Bank’s statement came out, its lowest level in the month.
How tame is inflation?
Inflation stood out because this is the first time an estimate has made it on to a statement, economists say. The Bank says the “underlying trend of inflation is 1.6 to 1.8 per cent, consistent with persistent slack in the economy.” Later it stresses that inflation risks remain balanced, but “a number of complex adjustments are under way.”
“This suggests, like their U.S. growth outlook, they now have at least some doubts over just how tame core inflation actually is at this point,” says BMO chief economist Doug Porter.
The Bank sees no big change on this front, saying “risks to financial stability remain elevated, but appear to be evolving as expected.” But Porter notes that the topic did make its way back into the statement after being absent the last few times.
What was missing
The “glaring” omission of how the oil slump is affecting growth puzzled Scotiabank economists.
“Glaringly missing is any comment about on how oil is affecting growth and we are left to assume those energy-related views are unchanged since the April MPR, i.e. that the impact of lower oil prices is frontloaded into Q1. There are only three mentions of oil in the statement: energy’s transitory effect on inflation, the resilience of consumption in the face of lower oil prices, and a stronger C$ because of stronger oil prices.”
Mark Chandler of RBC says the statement hasn’t changed their forecast of a rate hike in the second quarter, though he warns that it does hint of an uncertain future: “As the statement warns, ‘a number of complex adjustments are under way’ and there is still a fair degree of uncertainty around the expected outcome,” he said.
Nor did the statement change BMO’s view that the next rate move will be a hike in the second half of 2016. However, a shock in the direction of oil prices ($15-to-$20/barrel either way) or in the health of the U.S. economy (either way) could shake the Bank out of that holding pattern, says Porter.
“While we believe the Bank is on hold for an extended period — and the Bank likely believes it is on hold — we have a real world example of how Mr. Poloz is ready and willing to act abruptly if conditions change significantly. And, the overriding message from today’s Statement is that the Bank is keenly awaiting any new news from the incoming data,” Porter writes.
A bull …
Bullish among economists on the Canadian outlook, Bill Adams PNC financial Services Group
sees a rate hike in March 2016, about half a year after he expects the first U.S. rate hike.
And a bear
Today’s statement put off Capital Economics’ David Madani’s forecast of a July rate cut, but not for long. “Given the uncertainty around the oil shock and the recent tightening in financial conditions, we still think that rates will be cut further well before year end.”
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