HomeContributorsFundamental AnalysisBoC: Robust Data Drives Poloz to Tighten

BoC: Robust Data Drives Poloz to Tighten

Markets had put the odds of a rate hike this morning at about 50/50, but in the event, the Bank of Canada increased its key overnight lending rate 25bp, to 1.00%. Unsurprisingly, the short statement accompanying the decision struck a decidedly hawkish tone.

Recent economic data have been stronger than the Bank of Canada expected, and growth is seen as becoming “self-sustaining”. Strength in all major expenditure categories, except housing, has left the level of output above the Bank’s previous expectations. Global growth is seen as becoming more synchronized, although uncertainties persist.

That statement did acknowledge that excess capacity remains in labour markets, and that wage and price pressures are more subdued than historical relationships would suggest.

The Bank of Canada ultimately decided that the removal of some of the “considerable” monetary stimulus was warranted, but added that future rate moves are not predetermined, and will depend on how incoming data and financial market developments are likely to affect the path for inflation. Moreover, the Bank also acknowledged the level of the loonie, and the sensitivity of the economy to rising rates in the context of elevated indebtedness.

Key Implications

Today’s decision could have easily gone either way, but the robust run of economic growth left the Bank of Canada moving to remove some of the stimulus right away, rather than waiting for the communication opportunities that would have been afforded at their next decision, six weeks from now.

Indeed, Canada’s economy has been coming in hot of late, with emergency level interest rates no longer warranted. While an argument could be made that holding off a few weeks for the opportunity to more fulsomely explain how the outlook for the economy has evolved, this clearly did not hold sway in Ottawa today.

Interestingly, the short statement included an explicit reference to the recent appreciation of Canadian dollar (which rose further in the wake of the announcement, resulting in a roughly 3% rise against the U.S. dollar over the past month, or a nearly 14% climb from the April low). This somewhat unusual inclusion suggests that currency moves will be monitored closely as part of the data dependency expressed again today.

Indeed, the evolution of the outlook will be crucial for the future path of the policy interest rate. With slowing but still above-potential growth likely, this implies that absent a significant shock, today’s rate increase will be part of a larger and longer march towards interest rate normalization.

TD Bank Financial Group
TD Bank Financial Grouphttp://www.td.com/economics/
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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