Neither the inflation pickup in January nor the GDP growth acceleration in the fourth quarter, that topped the Bank of Canada’s own projection, will change the central bank’s monetary policy course at its Wednesday meeting, analysts predict.
This will mean a policy statement that will largely leave the bias unchanged, analysts anticipate, with no interest rate move in sight until at least the middle of next year.
“The adjustments to the inflation and growth discussions are likely to remain incremental at this point, with perhaps further to come in the April Monetary Policy Report, all depending on how the data comes in by then,” Desjardins Capital Markets Economic Strategist Jimmy Desjardins.
In its January 22 statement, the Bank of Canada said “the downside risks to inflation have grown in importance,” while household debt remains elevated, making the overall balance of risks unchanged from October.
What changed was the BOC’s approach, making its next decision explicitly data dependent. “The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks,” the January statement said.
In October, the BOC had stated that “the substantial monetary policy stimulus currently in place remains appropriate,” while also dropping its tightening bias by leaving out the reference to the normalization of interest rates.
Indeed, in its September statement, the BOC had said, “over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected.”
When it released its Monetary Policy Report last January, the BOC projected a 2.5% Q4 real GDP increase, below the 2.9% annualized growth reported last week by Statistics Canada, accelerating from 2.5% the previous quarter despite a poor performance in December, when the monthly GDP fell 0.5%, its largest decline since March 2009.
On the inflation front, the BOC revised down its inflation forecasts for this year, and to a lesser extent for 2015.
For Q1 2014, it expects year-over-year total inflation to rise 0.9% (revised down from +1.2% in October 2013), before picking up to 1.2% in Q2 (revised from +1.4%), 1.4% in Q3 (vs. 1.6%) and 1.5% in Q4 (vs. +1.7%), well below the 2% mid-point target.
The target would only become within reach in Q2 and Q3 2015, when total inflation is expected to rise 1.9% (unrevised for both quarters), before finally hitting 2.0% in Q4 (also unrevised).
Yet the statistics agency reported earlier this month that total CPI rose 1.5% in January year-over-year, up from +1.2% in December. The January increase was last matched in June 2012 and last topped in April 2012 (+2.0%).
BOC Governor Stephen Poloz was reported as saying the acceleration in price increases was “a little bit reassuring,” without, however, indicating a “fundamental pickup or reversal.”
The governor “had to acknowledge that inflation was resurfacing faster than he had anticipated,” Jean said in a commentary. “Indeed, under not necessarily bullish assumptions on CPI for February and March, we could see Q1 headline inflation hit 1.1% y/y, consequently above the January MPR’s 0.9% for Q1, and in fact close to the 1.2% expectation that had been ascribed to Q2,” he added.
That being said, even at 1.1%, inflation is unlikely to trigger the alarm at the BOC, although its statement Wednesday could refer to the January pickup.
For Desjardins’s Jean, who does not expect a rate hike until September 2015, the BOC currently has a “slightly dovish bias.”
While it is likely to keep the bias intact on Wednesday.
“Beyond the next few months,” however, “there is a possibility for inflation to exceed the BoC’s expectations, given that we have well-anchored inflation expectations, wage growth accelerating somewhat recently, a smaller drag from mortgage costs (and if anything, the CMHC’s premium hike is mildly inflation-positive), and (to some more limited extent in my view), a weaker currency.”
Jean referred to the recent decision by the Canadian housing agency – Canada Mortgage and Housing Corporation – to increase mortgage insurance premiums from May this year.
“I do see as plausible a scenario whereby the BoC’s rhetoric moves by mid-year to a neutral position, in terms of the inflation balance of risks assessment,” Jean concluded.
BNP Paribas analyst Bricklin Dwyer also expects a “more neutral policy bias” on Wednesday, with the BOC describing “more balanced risks to inflation.”
Bricklin, who expects the policy rate to remain on hold until the first quarter of 2016, also told MNI that on the growth front, he expects “no significant changes” in the central bank’s assessment on Wednesday.
In a previous commentary, Bricklin agreed with Jean that the BOC will “recognize the recent up-tick in inflation data as a positive sign that the risks of disinflation have relaxed,” while it will “take little signal from last Friday’s better-than-expected” Q4 GDP data.
Many analysts, however, consider the current bias as being already neutral, which will likely be reiterated Wednesday, according to Capital Economics.
Analyst Paul Ashworth told MNI that the statement will likely maintain the same language with regard to inflation, since 1.5% is still “well below target.”
As for the GDP growth pickup in Q4, it is not a “game changer” even if it came in stronger than the BOC had projected, with still no sign of rebalancing, which the statement will likely stress again Wednesday in his view.
Ashworth also played down the 0.5% drop in December GDP, since “it was was hit by the really bad weather, so it should bounce back.”
That being said, Ashworth continues to expect a rate cut next year, in line with his expectations of a weaker-than-consensus growth performance in Canada.
At Scotiabank, economist Derek Holt commented in a note that based on recent comments from BOC’s Poloz, he expects “more of the same” in Wednesday’s statement.
RBC’s economists, who do not anticipate a rate hike until 2Q 2015, also expect the central bank to continue “to indicate a neutral bias to the near-term policy outlook” in its statement.
The Bank of Canada will announce its interest rate decision Wednesday at 10:00 am ET, which won’t be accompanied by a MPR. The following interest rate announcement, on April 16, will be accompanied by a new MPR.