The Bank of Canada is widely expected to hold overnight rates steady at 1.25% at its next decision Wednesday, industry experts say.
In a weekly economics report, Derek Holt, vice-president and head of capital markets economics at Scotiabank, says trade policy uncertainty between Canada and the U.S. is among “compelling reasons” to pause the hike cycle. “Why [overnight index swap] markets have even a modest 15% chance of a hike is beyond me,” he writes.
Holt expects the upcoming announcement to be “a maintenance statement with a more cautious spin that buys time to assess developments on the path to the April monetary policy report.”
In CIBC’s weekly economics report, chief economist Avery Shenfeld agrees: “Look for the central bank to leave rates unchanged, and mention trade uncertainties as they stall for time.”
Other reasons to hold, says Holt, include ongoing NAFTA negotiations, waning growth measures, weak business investment intentions and market volatility.
On markets, Holt notes that the five-year government of Canada bond yield has risen about 35 basis points since mid-December, and sits at the highest level “since a brief pop higher in 2013.”
At the margin, rate pressure “imposes additional mortgage market tightening pressures into the key spring housing market,” says Holt, which is another reason to hold rates. “In fact, since early last June, the five-year bond yield has risen by over 100 [basis points],” he adds.
In a weekly economics report, TD economist Rishi Sondhi notes Q4 GDP, at 1.7% annualized, is below the Bank of Canada’s estimate of 2.5%.
“Economic growth has clearly downshifted from the solid pace observed in the first half of 2017, while December’s relatively modest print points to rather soft momentum heading into 2018,” says Sondhi. “This will likely motivate a downgrade to the Bank of Canada’s forecast for growth, and affords more patience on the rate hike front.”
Shenfeld says he doesn’t expect a hike until at least early summer and further tightening could be limited to a single quarter-point. He also doesn’t expect much communication from the central bank this week.
“A distaste for forward guidance will keep the BoC from delivering any clear-cut signals of what lies ahead,” he says. The central bank “will retain the view that rates will eventually be higher, but will have enough cautionary words about the outlook to justify a stand-pat stance this month.”
Benjamin Reitzes, Canadian rates and macro strategist at BMO, says in a weekly financial digest that, since this week’s announcement isn’t accompanied by a monetary policy report, “there’s some chance markets could misinterpret the message—something we’ve seen recently.”
The BoC will hold its first post-meeting update speech on Mar. 8 to ensure the appropriate message is received, he adds.
The bottom line, says Reitzes, is that there are enough uncertainties looming over the outlook that there’s no rush for the BoC to tighten again in the near term.
“Expect a cautious tone, but no sign that the [central] bank will back off its tightening trajectory,” he says.
For example, on the plus side, core inflation continues to trend higher, with two of the BoC’s three measures up to 1.8%, with the third at 1.6%.
Says Reitzes: “The upward drift in core CPI is consistent with the BoC’s view that the economy is operating at potential. Indeed, as long as inflation continues to edge higher, that should keep the BoC in tightening mode, assuming growth doesn’t fall below potential.”