The Bank of Canada will make no change to its 1.0% policy interest rate on Wednesday nor to its neutral tone on whether the next rate change some time ahead might be up or down, analysts said.
However, the predictions now are shifting to near-unanimity that the coming change, in about mid-2015 or a quarter or two later, will almost certainly not be a rate cut but a rate hike, even if the BOC is not yet suggesting that.
For now, the message to be taken from a brief statement accompanying the rate decision will be that hikes remain a long way off and will be slow and gradual when they do arrive. A fuller analysis will be offered by the Bank in its next quarterly Monetary Policy Report on July 16.
Although the Bank had been concerned about too-low-for-too-long inflation in Canada and had moved from suggesting rate hikes ahead at some time to the neutral tone that any change could be down as well as up, a surprising increase in headline CPI inflation was reported by Statistics Canada recently to the Bank’s 2.0% target. Some felt that concern for too-low inflation was over. But the Bank may stand pat in its forward guidance tone Wednesday since core inflation, which helps guide BOC decision making, remains well below the target at 1.4%.
Still-low core inflation and continuing slack in the economy as evidenced by last week’s GDP report, which showed a lackluster 1.2% growth in the first quarter, below the BOC’s forecast of 1.5% – and with little sign of the long-hoped-for transition to exports and business investment as main economic drivers – will balance any leaning toward the Bank returning to a rate-hike outlook, analysts said.
Further, CIBC Chief Economist Avery Shenfeld told MNI the BOC will not want to support a gain in the Canadian dollar, presently running 8 and 10 cents below parity with the U.S. dollar. Governor Stephen Poloz is concerned about the weak advance of Canadian exports, to the United States and abroad, and a lower Canadian dollar is seen as encouraging exports, so that “he will not want to see the dollar rise, as it would if and when rates go up,” Shenfeld said.
The 1.2% 1Q GDP growth rate published last week, which came in below the 1.7% annualized growth pace expected by analysts, and was the smallest increase since the +0.9% recorded in Q4 2012, is likely to have no effect on the BOC’s stated positions, analysts said.
Most told MNI they expect the BOC to wait to see second quarter results, whether there is a bounce-back from weather-stricken first quarter, before it changes its expectation of a closing of the slack in the economy by late 2015 or early 2016. Benjamin Reitzes, senior economist at BMO Capital Markets, told “there is nothing here (inflation vs. GDP ) to change the BOC neutral stance.”
Reitzes said “the timing of the output gap closing should be unchanged,” and there would be no change to the expected timing for a BOC rate increase, which he anticipates in July 2015.
Paul Ferley, assistant chief economist at RBC Economics, “we see no near impact (of the GDP report) on the BOC but it certainly will be monitoring future data.” He expected the Bank to make a point on Wednesday of saying it will be keeping a close eye on future economic indicators.
David Madani, Canada economist at Capital Economics, also expected the Bank to provide no change to further guidance and to say that any future change “will depend on the data.” Madani, “we think the Bank will remain firmly in a neutral position.” He cited concern about exports and business investment, while a fading housing construction boom would provide “a continuing drag on the economy.”
In a similar vein, economist Jimmy Jean at Desjardins Capital Markets wrote to clients on Monday that the rebound in inflation is balanced by “the Canadian economy’s current shortcomings.” He said, “these include the still-unconvincing sighs of a lasting transition to exports and investment as growth drivers, as was vividly portrayed in the Q1 GDP report.”
Jean also saw a drag on growth coming from several provinces having to “make an even greater effort to mop up their deficits.”
Ten economists grouped together in a Monetary Policy Council of a leading think tank, the C.D. Howe Institute, have called for the Bank to hold on to its 1.0% rate Wednesday and on July 16, while four broke off to suggest a rate hike in the November setting, and more of them for settings further on. They see “a cautiously positive outlook,” based on the lower Canadian dollar encouraging exports, “positive manufacturing trends and an improving U.S. economy.”