Economic momentum not enough for BoC action

By Staff | January 13, 2017 | Last updated on January 13, 2017
4 min read

“Nobody is expecting anything from the Bank of Canada these days, and for good reason.”

So says Avery Shenfeld, chief economist of CIBC Capital Markets, in his latest weekly update.

Though Canada’s growth is meeting BoC’s last projection, he expects the Bank to stand pat on rates.

Even with Donald Trump in the foreground, “the Bank doesn’t tend to incorporate government policy changes before they’ve happened, suggesting only slight adjustments to their U.S. assumptions,” he says.

Shenfeld isn’t alone in his view.

Reports from TD, BMO and National Bank all point to the bank holding on rates on Wednesday and in the months to come.

Read: What bank economists say will happen in 2017

As BMO senior economist Benjamin Reitzes says, “The January 18th Bank of Canada meeting approaches with perhaps the least amount of uncertainty seen in some time. The Bank is universally expected to keep policy rates steady at 0.5%.”

He adds: “Any talk of rate cuts is now history, with the conversation turning to when policymakers will follow the Fed’s lead and start hiking rates. [But] the latter still remains a long way off, likely a 2018 story, as Canada continues to have a sizeable output gap.”

This month, the bank will highlight why domestic interest rates should remain low, despite the upbeat tone of the its latest Business Outlook Survey. That survey found the economy is beating the central bank’s forecasts and businesses are optimistic.

Read: Canadian firms expect U.S. growth despite uncertainty: BoC

But, says TD senior economist Brian DePratto, “Bank of Canada Governor Stephen Poloz is seemingly trapped between two conflicting sets of data: on one side is near-term economic growth. […] Offsetting this is soft inflation.” He says the BoC’s main concern is its inflation target.

DePratto expects that “Poloz may push back against expectations of interest rate increases, perhaps hoping to talk down longer-term yields.”

He adds: “In contrast to market views, TD Economics sees the risks around Canadian monetary policy as remaining skewed towards further easing, not an increase. […] Weak inflation may be the catalyst that spurs further monetary easing.”

National Bank will be watching for the BoC’s updated economic forecasts in its Monetary Policy Report.

Also this week, crucial November data on the manufacturing and retail sectors will be available, National Bank notes, along with December data on the consumer price index. “All told, annual inflation is expected to be 1.6%, up four-tenths from November’s level,” the bank says.

As Shenfeld notes in his report, Canadians will have to remain patient. “If the [Bank’s] growth forecast doesn’t change much, the numbers would still leave a lot of slack through 2017. Having seen five-year and longer rates move up with those stateside, the Bank of Canada will certainly be reminding markets that we’re a lot further from any policy tightening than the U.S.”

As a result, markets should focus on political developments south of the border. He says, “There are major downside risks to Canada in some of the protectionist measures built into tax reform and trade policies under discussion by those in Congress and the incoming administration.”


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The vote is in…

The C.D. Howe Institute’s Monetary Policy Council agrees the BoC should keep its target for the overnight rate at 0.50% for the next six months. The council recommends the rate be raised by January 2018.

MPC members are confident that global and domestic growth will bring Canadian inflation back to its 2% target as we move into 2018; their calls for a higher overnight rate target going forward reflects this outlook.

The group points to improvements in private-sector sentiment in the United States and Canada, and to higher oil prices and a better tone to investment intentions. Several MPC members see potential protectionist measures in the United States as a medium-term threat, but their dominant sentiment is that demand will get more robust.

MPC members also discussed the U.S. labour market and the potential for more aggressive interest rate hikes by the U.S. Federal Reserve than the market expects, which would knock the Canadian dollar.

But the dominant topic was inflation expectations. Many MPC members say the dominance of below-2% inflation readings since 2012 hasn’t damaged confidence that Canada’s inflation rate will average 2%, but some members worry expectations are dropping.

In particular, the MPC is looking for further discussions of inflation expectations and the associated risks in future communications from the Bank.

Read: Analysts expect BoC to stand pat until 2018 staff


The staff of have been covering news for financial advisors since 1998.