BoC: On Hold, Raises Forecast with Cautious Tone - Nomura
Charles St-Arnaud, Research Analyst at Nomura, notes that as widely
expected, the Bank of Canada (BoC) kept its policy rate unchanged at
0.5% and reiterated its neutral policy stance, saying that “the overall
balance of risks remains within the zone for which the current stance of
monetary policy is appropriate”.
Key Quotes
“This
suggests that the BoC is not considering any changes to monetary policy
for the foreseeable future. Interestingly, while the BoC upgraded its
forecast for 2016, the statement remains very cautious.
On the
domestic economy, the BoC acknowledges that growth in the first quarter
will be “unexpectedly strong”, with the BoC expecting 2.8% q-o-q ar.
However, the BoC also cautioned that “some of that strength is due to
temporary factors and is likely to reverse in the second quarter”, with
growth expected at 1.0% q-o-q ar.
Despite all these headwinds on
the Canadian economy, the BoC raised its growth forecast for 2016 to
1.7% from 1.4%, while growth from 2017 inched lower to 2.3% from 2.4%.
As a result of the stronger growth and a lower estimate of potential
growth, the BoC expects the output gap to close in the second half of
2017.
On inflation, the outlook remained roughly unchanged with
total CPI inflation expected to remain weak because of low oil prices.
On its side, core inflation is forecast to remain close to the BoC’s 2%
target, as the impact of past CAD depreciation will be offset by excess
capacity.
Overall, while the BoC kept rates unchanged and
upgraded its forecast, these higher growth expectations are mainly the
result of fiscal stimulus. As such, if the impact from the fiscal
stimulus is excluded, momentum in the economy looks weaker than in
January. This suggests that without increased fiscal spending, the BoC
would have likely needed to cut rates. Nevertheless, because of the
impact of fiscal stimulus and the expected growth, we continue to
believe the BoC will keep its policy rate unchanged for the rest of the
year.”
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