Canada: A walk Back to Neutral - ING
James Knightley, Senior Economist at ING, suggests that a more upbeat
prognosis from the Bank of Canada suggests a long period of policy
stability lies ahead.
Key Quotes
“The
Bank of Canada (BoC) left monetary policy unchanged yesterday, in line
with market expectations – the overnight rate remains at 0.5% – while
the accompanying statement suggested that there is a declining prospect
of any further policy easing from them.
While the BoC
acknowledged that the global backdrop hasn’t been as positive in the
first quarter as they had predicted, the growth story for Canada in 1Q
“appears to have been unexpectedly strong”, although this has been put
down to temporary factors. The statement highlighted decent job creation
and expanding household demand whilst also stating that investment
spending should turn more positive in 2H16. Indeed, “it does appear that
the positive forces at work in the economy are starting to outweigh
those that are negative” the statement goes on to say.
The Bank
also emphasized the boost from changes to fiscal policy under the new
government with the statement suggesting that the March budget measures
“will have a notable positive impact on GDP”. Consequently, we actually
see the BoC upwardly revising growth projections, which mean that “the
output gap could close somewhat earlier than the Bank had anticipated in
January”.
Given they also sound relatively relaxed on the
recent movements of the Canadian dollar and core inflation is already
close to target, we are going to need to see some fairly significant
data disappointments to get any more rate cuts. Consequently, we now
expect the BoC to remain on hold until 2Q17 when we believe interest
rate hikes will start occurring.”
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