“There is no predetermined path for interest rates from here.”
That remark came from Bank of Canada Governor Stephen Poloz in a speech today that highlighted the central bank’s plan to carefully monitor economic indicators to decide on the direction of monetary policy.
While growth in the second quarter far exceeded expectations, and showed the expansion becoming more broadly based and self-sustaining, “recent data point clearly to a moderation in the second half of the year,” Poloz said.
The challenge for the BoC now is to weigh upside and downside risks to inflation as the economy approaches capacity.
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Polo said that, as the economy nears its potential, business investment can have the effect of pushing out the economy’s capacity limits — either through increases in productivity or the workforce — giving the economy more room to grow in a non-inflationary way.
Other unknowns clouding the outlook for inflation include the impact of the digital economy, which may be placing downward pressure on inflation; ongoing weak wage growth; and the sensitivity of the economy to higher interest rates given elevated levels of household debt.
“Monetary policy will be particularly data dependent in these circumstances and, as always, we could still be surprised in either direction,” said Poloz.
In a note, Nick Exarhos, director at CIBC World Markets, says, “The majority of the speech confirms our assumptions that tightening from the Bank of Canada will be a gradual affair from here, with our estimate being that the next move will have a 2018 time stamp.”
That’s bearish for the loonie, he says, which he expects will weaken by a few more cents come year-end. It’s “bullish for the front end of the Canadian curve,” he adds.
Read: Expect ‘significant’ increase in bond yields: economist
The BoC’s next scheduled rate announcement is scheduled for Oct. 25.
Inflation inches closer to BoC target in August