Central Bank Views

BOC Left Rates Unchanged, Differentiating Itself from Fed

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BOC, as widely anticipated, left the policy rate unchanged at 0.5% in December. The central bank maintained a dovish tone as in recent meetings. While acknowledging that global market conditions have 'strengthened', 'undiminished' uncertainty has continued to undermine 'business confidence and dampening investment in Canada's major trading partners'. Of particular note is that BOC explicitly indicated its different from the Fed, attempting to dampen hopes that BOC would follow the Fed in raising interest rates. It also attributed the recent increase in Canadian treasury yields to US factors, instead of domestic fundamentals. We expect BOC to leave the policy rate unchanged, as well as maintaining a dovish tone, throughout 2017.

The accompanying statement is exceptionally brief. On global developments, BOC noted the 'strengthening' in economic conditions. Yet, it added that 'the uncertainty, which has been undermining business confidence and dampening investment in Canada's major trading partners, remains undiminished'. Domestically, policymakers also acknowledged that 'the dynamics of growth are largely as the Bank anticipated'. They also noted the recent pickup in inflation, but attributed the below-expectation improvement to lower food prices. Moreover, they noted that core inflation is being held back by 'persistent economic slack' which is 'offset by that of past exchange rate depreciation, although the latter effect is dissipating'.

The central bank strived to distinguish Canada's situation from the US'. As noted in the statement, 'business investment and non-energy goods exports continue to disappoint. There have been ongoing gains in employment, but a significant amount of economic slack remains in Canada, in contrast to the United States'. Concerning the sharp rise in Canadian yields, BOC judged that it was driven by the market's 'anticipation of fiscal expansion in a US economy that is near full capacity'.

In the concluding paragraph, BOC judged the current monetary stance is 'appropriate'. In our opinion, BOC should likely leave the policy rate unchanged, as well as maintaining a dovish tone, throughout 2017