As expected, BOC left its overnight rate unchanged at 0.5% in January. Yet, it delivered a more dovish than expected message and sent CAD to a one-week low against USD. At the press conference, Governor Stephen Poloz revealed that ‘Governing Council was particularly concerned about the ramifications of U.S. trade policy, because it is so fundamental to the Canadian economy’. He suggested that further rate cut cannot be ruled out of US’ protectionist policy puts BOC’s inflation target at risk.

Both the accompanying statement and Poloz’s opening statement at the press conference stressed the uncertainty about the global economic outlook is a concern to Canada’s growth outlook and BOC’s monetary policy stance. As noted in the meeting statement, ‘uncertainty about the global outlook is undiminished, particularly with respect to policies in the United States’. Poloz elaborated at the press conference that the members were ‘particularly concerned about the ramifications of US trade policy, because it is so fundamental to the Canadian economy’. Yet, BOC’s initial assumption was that fiscal stimulus, ‘specifically, corporate and personal tax cuts that would raise the level of US GDP by about 0.5% in 2018’. On the exchange rate, BOC acknowledged the recent strength in Canada dollar, alongside the USD rally, warning that the phenomenon is ‘exacerbating ongoing competitiveness challenges and muting the outlook for exports’.

On the macroeconomic outlook, BOC expect the economy to expand above trend in 2017 and 2018. It has revised higher Canada’s GDP growth to +1.3% in 2016, from +1.1% previously, before accelerating to +2.1% in 2017 (previous: +2%) and steadying at the same rate in 2018. BOC continues to expect the economy to reach full capacity around mid-2018. Consumer spending would remain ‘solid’ and would remain the key growth driver this year, with the help of Federal and provincial fiscal measures. Net trade is expected to be neutral for growth, while business investment and housing would be ‘tempered by previously announced changes to housing finance rules and by mortgage rates that have risen in response to higher bond yields’. While acknowledging the undershooting of inflation since October, BOC did not seem very concerned about slow pace. According to BOC, ‘as consumer energy prices rise and the impact of lower food prices dissipates, inflation is expected to move close to the 2% target in the months ahead and remain there throughout the projection horizon while excess capacity is being absorbed’.

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BOC judged that it is appropriate to maintain the overnight rate at 0.5% and pledged to ‘assess the impact of ongoing developments, mindful of the significant uncertainties weighing on the outlook’. At the press conference, Poloz pledged that a rate cut remains on the table and ‘it would remain on the table as long as those downside risks were still present’. For now, we retain the view that BOC would leave the monetary policy on hold throughout the year.

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