Bank of Canada holds rates: What the analysts say
The Bank of Canada on Wednesday chopped its economic growth forecast for the country and left interest rates unchanged but still insisted the next move in interest rates would likely be a hike. Here are what the analysts say about its statement:
Avery Shenfeld, CIBC World Markets
The Bank of Canada stuck to its guns that the next move will be a rate hike after a “period” at 1%, making no explicit pledge that the period on hold will be longer or extended. However, reading between the lines of its forecast, a longer wait, perhaps until early 2015, might be in the cards. While the Bank simply offset a lower 2013 outlook (now at 1.5%, down from 2.0%) with faster growth projections for 2014-15, even that pushed off the timetable to close the output gap until mid-2015. And that relies on a more brisk 2.8% forecast for 2014 that we see as about a half point higher than likely. So while the Bank may still be thinking about a late second half 2014 rate hike, a more moderate growth path could well see no move until early 2015. The Bank cited some special factors in the ultra-low inflation rates posted over the last half year, but its view on the output gap still has inflation well in check over the forecast horizon. None of this should be a big deal for markets, which had already priced away any threat of a rate hike in the next several quarters, and put some odds on an ease, which the Bank is giving no support to today.
Derek Holt, Scotiabank Economics
The retention of the hiking bias (“…after which some modest withdrawal will likely be required”) in favour of an eventual hike is not at all unexpected. They do not want to feed the cut camp and that’s the only reason for retaining that element of the bias such that when a central bank tells you they’re not on a hiking campaign into at least 2015, it’s a tad out-dated to interpret this as a hawkish bias. What they’re doing is incrementally, statement by statement, extending the pause. Indeed, if the output gap does indeed remain open until mid-2015, a hike after that point is not out of the cards as inflation pressures would be more likely to emerge well after the gap’s closure assuming growth is strong enough to push the economy into material excess demand.
On net, we have even greater confidence in our forecast for no BoC hikes this year or next, and while we don’t publish further out, I remain of the view that they hike in 2015 at the earliest with significant tail risk later yet. If so, then Canada has fully lost any expected future spread advantage to the US at the front end and that is among the factors leaving CAD negatively exposed to significant weakening over time in my opinion.
Paul-André Pinsonnault /Krishen Rangasamy, NBF Economy & Strategy
The BoC maintained its interest rate guidance unchanged, but recognized that the output gap will only close by mid-2015. So, the central bank is implicitly conveying the message that the “period of time” for which current monetary policy stimulus will remain appropriate, is perhaps more extended than it previously assumed.
The BoC’s 2013 growth forecast for Canada, now matches our own call of 1.5%. That said, the central bank is, in our view, too optimistic about next year. The contribution from government spending, despite the downgrade, continues to be too upbeat in our opinion. Ditto for housing, which we expect to be more of a drag. Those, together with a likely deceleration in the labour market, and a trade sector struggling by a soft global economy and the lagged impacts of the strong Canadian dollar, should keep 2014 growth tepid (2.2% in our view). The IMF and consensus expectations for Canadian growth have moved in our direction lately. If consensus is right, i.e. using Bloomberg’s consensus forecasts for Canadian GDP growth, the output gap doesn’t close until the end of 2015 (see Chart). All told, we expect BoC interest rate hikes to be delayed until Q1 of 2015.