BoC To Keep Rates Unchanged But Note Downside Risks

Rates To Remain At 0.5%

The Bank of Canada meets later today for its October rates meeting. Markets are broadly expecting the bank to keep rates unchanged at 0.50%. At the September meeting, the bank noted that “risks to the profile for inflation have tilted somewhat to the downside since July” but also added that “the bank’s governing council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate”. In light of these comments, it seems reasonable to expect that the bank will retain this stance and remain on hold.

Statement To Note Downside Risks

However, the statement itself is likely to see the bank reiterating that inflation risks remain skewed to the downside and thus a lowering of the bank’s growth forecast can also be expected from the Monetary Policy Report.

Economic data over the recent month has been strong and consistent with the bank’s forecast of a “substantial rebound in the second half of this year”. However, the majority of this strength is coming from a normalisation in activity in the wake of the disruption caused by the Alberta wildfires.

Despite this rebound, there are indications that underlying momentum remains weak. Of note is the continued underperformance in non-energy exports reflects that improvement in the trade balance is mainly a function of the normalisation in Oil exports.

In terms of gauging the BOC’s rate path over the remainder of the year there are two key factors to consider 1) Given the continued underperformance in non-energy, is the recent rebound in exports sustainable?  2) What will be the impact of fiscal stimulus?  Further clarity on both these questions is needed, and until such a time, the BOC is likely to remain in wait and see mode.

On The Data Front

Key economic readings since the last meeting have printed strongly. Monthly GDP was up 0.5% in July, beating market expectations. Led by a surge in the energy sector, the goods-producing side of the economy contributed the most growth in July with growth excluding mining, oil and gas coming in at a more modest 0.2% on the month.

The labour market too has shown encouraging signs with the September headline employment print coming in at 67.2k, the highest level since March 2012, following on from a strong print in August of 26.2k.

 

Looking at Inflation then and prices were slightly weaker than expected in August falling 0.2% on the month and bringing the year over year rate to 1.1%.  Core CPI was also below expectations at 1.8% YoY vs. 2% in July.  Whilst the weaker Core reading was a surprise it is likely a little too early to say that this will be a cause of for concern for the BOC just yet.

 

 

August trade data showed a slowdown in the record rebound noted over July, particularly the non-energy export component.  Although the headline figure has continued to improve since a deterioration in June, the increase in exports volumes has been negated by a larger increase in import volumes suggesting that net export volumes actually subtracted from growth in August.

Lower non-energy exports in August could also be an early warning sign that July’s strong recovery was only temporary creating yet further uncertainty about the recovery.  Deputy Governor Wilkins commented in a speech recently that these uncertainties were a consequence of “future growth prospects for investments in the United States and the possibility that “the effect of lower oil prices on the American economy is not as anticipated”.

Forecast Changes

In line with the bank’s judgement in September that “the profile for economic activity will be somewhat lower than anticipated in July”, the bank is likely to revise lower its growth forecasts with the underperformance in exports over the year likely to have reduced the expected rebound over H2 2016.

Inflation is likely to be forecast to gradually return to the bank’s 2% target over the coming quarter supported by Oil prices which remain around $50per barrel currently, as expected in the July Monetary Policy Report.