- Expectations are for the central bank to keep the overnight rate unchanged at 1.25%
- Uncertainty over NAFTA negotiations likely to be a key discussion point
- USD/CAD trades near its highest level since July 2017 when the BoC surprisingly hiked rates
The Bank of Canada (BoC) will hold their interest rate decision on Wednesday. This is a statement-only meeting – no Monetary Policy Report or press conference – and all analysts surveyed by Reuters expect the central bank to keep the overnight rate unchanged at 1.25%, after the hike in January.
RECENT ECONOMIC DEVELOPMENTS
After a rip-roaring start to 2017, GDP growth slowed towards the end of the year. Q4 GDP growth was just 1.7% Q/Q on an annualised basis, up from the 1.5% growth in Q3 but down from the 4.3% seen in Q2. Despite the slower growth, RBC expect the BoC to categorise this as “evolving roughly as expected since the January MPR.”
Inflation surprised to the upside in January, rising 1.7% Y/Y vs. expectations of 1.4%, nevertheless this was still softer than the 1.9% increase in December, but the core measures were still relatively strong. An average of the three core measures (trimmed rate, median rate, and common rate) rose to its highest level since September 2016 of 1.83% vs. 1.77% in December.
The monetary policy meeting comes a full month after the latest employment figures which showed a shock decline in employment in January. RBC note that the decline was mainly influenced by a 21% increase in the minimum wage in Ontario while they also posit that other underlying metrics were strong. The decline in employment was largely due to a large fall in part-time employment while full time jobs increased by 49K.
Furthermore, the BoC should again highlight NAFTA negotiations and trade protectionism measures as a risk to the outlook for business investment. Canada’s NAFTA negotiator said after the latest round of talks that Trump’s tariffs on steel or aluminium were unacceptable and the country would take appropriate measures to defend workers and industries if needed. However, she was keen to stress that progress had been made in the recent talks.
At the early part of the year, BoC officials sounded more positive on the outlook than how they have been sounding recently. Governor Poloz has said that slack still remains in the labour market while Deputy Governor Wilkins said that the quarter (Q1) did not get off to the best start. Capital Economics note that “since policymakers last spoke, the incoming news on trade and housing have been worse. While the risk of a potential demise of NAFTA is rising, the housing bust that we have long feared appears to be materialising.”
POTENTIAL MARKET REACTION
OIS markets are pricing in around a relatively low 15% chance of a hike at this meeting. If the BoC keep rates unchanged, as most expect, then focus will turn to comments in the statement on how the BoC views recent developments such as the weak labour market report, NAFTA talks, and inflation. The CAD has been weakening in recent months with USD/CAD approaching 1.3000 to the upside as the CAD trades at its weakest against the USD since the BoC surprised the market with a rate hike in July 2017. Any dovish comments and hints of a longer pause in rate hikes could see USD/CAD breach that key 1.3000 level to the upside while a suggestion that an April rate hike is still on the table could see the CAD reverse some of the weakness seen since the beginning of February.