NO RATE HIKE FROM BOC
in a dramatic policy shift that highlighted lower-than-expected growth and the risk of persistently weak inflation.
Here’s what economists are saying about the statement:
Peter Buchanan, CIBC:
The Bank’s statement this morning was surprisingly dovish, lending potential support to fixed income, weighing on the C$. Of particular note, the Bank has removed the previous tightening bias. The policy part of the statement refers to downside risks on the inflation side given the persistently below target CPI offsetting earlier unease over household sector imbalances. The outlook has also been significantly downgraded, with gdp growth this years pared two ticks to 1.6% and a four tick cut in 2014 to 2.3%. The expected date for the closing of the output gap has been pushed back two quarters to the end of 2015, consistent with the slower profile for growth. The economy is now seen as expanding at a 1.8% pace in Q3, two percentage points below earlier expectations and slightly softer than our own call. Overall, a solid plus for bonds, negative for the dollar, to reiterate.
The Bank of Canada’s decision to downgrade its economic outlook and drop its vague tightening bias supports our view that if there is any change in monetary policy over the near-term, it would be to provide more policy support, not less. With economic growth likely to remain sluggish and housing likely to re-emerge as a drag next year, we wouldn’t rule out a rate cut at some point.
Derek Holt and Don Zigler, Scotiabank Economics:
This is all very consistent with our view that the BoC is on hold into late 2015 or possibly 2016 and much later than consensus which is still tracking late 2014. Consensus will be revising their forecasts after this, but the market is voting. I think the BoC will resist cutting the o/n rate, but will welcome the rally. The BoC put it well in flagging risks of a rate cut when it noted in the final paragraph that they are more concerned about persistent downsides to inflation, but are cognizant of the risks of “exacerbating already-elevated household imbalances.” In my opinion, the household imbalances will turn to a considerably softer picture over time that will require prolonged easy money in Canada.
Our views on the output gap are now somewhat eerily aligned for the first time since I can remember offhand as our revised outlook for the output gap using the BoC’s lowered potential growth assumptions and our own actual GDP growth forecast matches the BoC’s output gap using their potential and actual growth assumptions.
Gone is the eventual hike bias that was always very weak in any event as Governor Poloz re-writes the bias inherited from Carney though under somewhat different circumstances. To remove it makes an already dovish central bank even more dovish. It will naturally invite fast money to put on leveraged bets at the front-end in favour of a cutting bias and the risk in a modest market like Canada is pointed toward over-shooting on CAD weakness and front-end strength as 2s and 3s have become dearer by about 6bps each so far this morning. I think more CAD weakness and a further front-end rally will be forthcoming.
Paul-André Pinsonnault and Krishen Rangasamy, National Bank:
The downgrades to the growth forecasts for Canada are not surprising considering the deterioration in the economic and political environment south of the border, something which had the BoC revise down sharply the expected contribution of trade to growth. In that context, the BoC decided to drop its reference for a gradual normalization of policy interest rate in its press release, i.e. the watered-down tightening bias has been removed. The downgrades mean that the output gap now closes only at the end of 2015 according to the BoC. Does that open the door for rate cuts? Given the BoC’s restatement of its concern about household imbalances, it will take significantly weaker numbers than its now-modest growth rates for 2014. Given our forecasts of an improving US economy next year (something that will give a boost to our exports and hence growth), we view that outcome as unlikely. We continue to expect the next BoC to remain on the sidelines throughout next year.
Michael Gregory, BMO:
The Bank of Canada dropped its longer-run tightening bias (“Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected…”) saying only “the substantial monetary policy stimulus currently in place remains appropriate.” Given that this bias served as a moral suasion tool to curb household credit appetites (to complement macro-prudential policy tightening efforts) and as a signal that the Bank was not inclined to cut rates in the shorter run, its dropping is a major policy development.
The real GDP forecast downgrade had a . . . meaningful impact and the output gap is now expected to close by the “end of 2015” instead of “around mid-2015” before. This will delay any prospective rate hiking campaign. Indeed, for the first time in a long while, there was no reference in the MPR or Statement to the projection period incorporating some removal of monetary stimulus. Policy rates could end up being lower for a lot longer.
Diana Petramala and Leslie Preston, TD Economics
Given renewed strength in housing, the central bank did recognize the need to take into consideration the risk of exacerbating household imbalances. For now, however, it believes that slower credit growth and higher mortgage interest rates “point to a gradual unwinding of household imbalances”.