As Growth Falters, Dovish Bank Of Canada Firmly In Wait-And-See Mode

Source: Shutterstock 

At its latest policy meeting, the Bank of Canada opted to keep rates at 1.75% but went up a notch on the dovish scale, but this isn’t too surprising in the aftermath of the steep downside miss on fourth-quarter GDP (0.4% QoQ, annualized). Growth has slowed sharply since its second-quarter peak, with energy-related factors driving investment significantly lower in the final three months of the year (-2.7% QoQ).

For this reason, the BoC has made it clear that it will be prolonging its pause for a little while longer, with the press release indicating there is 'increased uncertainty about the timing of future rate increases'.

Nonetheless, we still believe the central bank would like to resume its tightening cycle this year if economic fundamentals don’t deteriorate further and downside risks stay at bay. The earliest this is likely to be is in the third quarter, allowing time to see how the Federal Reserve acts over the next few months.  

Next rate hike will depend on three key factors

1. Household spending

Unemployment has been hovering around a 40-year low for some time now, but the relatively strong labor market hasn’t always translated into better household activity. Both the housing market and overall spending suffered in the final quarter of last year - a mixture of higher interest rates, tighter mortgage rules, and trade-related confidence knockback being the likely causes.

However, there are increasing signs of strength. January finally brought a long-awaited pick-up in wages, and we don’t expect this to be a one-off. Recent Business surveys have suggested firms are wanting to invest in their workforce to lift labor-related production constraints, suggesting further upside in wage growth may be on the horizon. This bodes well for domestic demand if this upward trend continues.

2. Oil markets

Last year’s fall in oil prices and the weakening in Canadian oil differentials were at the heart of Canada’s disappointing growth story. Pipeline constraints restricted export flows, leading to large inventory builds in the domestic market, which weighed on Western Canada Select significantly more than global benchmarks.

1 2
View single page >> |

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.