Canada: A walk Back to Neutral - ING

Canada: A walk Back to Neutral - ING

14 April 2016, 12:44
Roberto Jacobs

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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