Due On Wednesday 6th September 2017 At 15:00 BST/09:00CDT
- The majority expects the BoC to leave its overnight rate unchanged at 0.75%. Only 6 of 33 surveyed expect the BoC to hike this time out, while the OIS curve prices in a 45% chance of a hike.
- A strong Q2 GDP release and the ensuing solid handover to Q3 has put a hike on the table at the upcoming decision.
- Many are still cautious regarding further hikes owing to a lack of inflationary pressure.
The majority expect the Bank of Canada (BoC) to leave its overnight rate unchanged at 0.75%. Only 6 of the 33 surveyed in the latest Reuters poll are looking for a hike at the upcoming meeting, while 24 expect the BoC to hike at its October meeting. The remainder expect the next hike to come in January. Markets are more aggressive following a strong June retail sales release and impressive Q2 GDP release (4.5% on a QQ annualised basis, which was above the top end of expectations). Swaps are currently pricing in a circa 45% chance of a hike this week (odds stood at circa 20% pre-GDP), with an October hike baked into the curve.
July’s decision saw the BoC raise rates for the first time in 7 years after a slew of central bank rhetoric paved the way for the hike in the weeks running in to the decision, although the initial change of tone caught both markets and economists off guard. The hike still caught some unaware, as many still believed that the central bank lacked evidence of notable inflationary pressure, with the BoC’s 3 core measures all tracking below 2%.
July’s decision was accompanied by the quarterly Monetary Policy Report (MPR) with the latest batch of projections available below.
The upcoming decision will not be accompanied by a MPR, and BMO believes that “the BoC has a better opportunity to explain its policy in October when it updates its economic forecasts and holds a press conference.” BoC officials have refrained from making any public speeches since the July rate hike, with BMO positing that “after the pains they went through to signal July and then you get nothing, it just makes it difficult to believe they want to go again.” Although BMO does warn that “with this bank you can’t rule anything out.”
In terms of the big Canadian banks, both CIBC and Scotiabank are looking for further tightening this week, while RBC and National Bank expect the next move to come in October (with National pencilling in another move for December).
Those looking for the BoC to stand pat this time out are focusing on inflation and expect the BoC to allow time to pass show whether the still-tame inflationary pressure is picking up. Another worry is the domestic currency which has surged in recent months, with many suggesting that such a move (if prolonged or extended) could harm exports, which are already a worry for the BoC. Indeed, those that are looking for a hike expect BoC governor Poloz to temper any possible post-hike hike CAD strength with a balanced statement given the Governor’s previous concern regarding the currency’s strength. CIBC suggests that “the statement could underscore that by pointing to still-tame core inflation and a firm Canadian dollar as a drag on growth.” It is also worth noting that both CIBC and Scotia have caveated their calls for a hike, highlighting why the BoC may not tighten alongside their respective arguments.
Over the longer horizon, fallout from the hot housing market presents worries, the outcome of the NAFTA renegotiations could have huge economic consequences for Canada given that 75% of the country’s exports go to the US. There is a pretty even split on the future of NAFTA with 15 out of 25 analysts surveyed in a Reuters poll stating that they were very or somewhat concerned that Trump would make good on his threat to terminate the trade pact.