BOC left the policy rate unchanged at 1.5% in August. Comments from Governor Stephen Poloz also signaled that a rate hike in October is highly likely. Yet, the market interpreted the message sent in the meeting was more cautious than previously. While acknowledging strong growth in the second quarter, the members affirmed that the economy is “closely in line” with projections. While noting accelerated inflation in July, the members blamed the idiosyncratic factors as causing volatility. While admitting that the economy has been “operating near capacity for some time:, it warned of the ongoing moderate wage growth. While guiding the next policy action as a rate hike, the central bank emphasized the uncertainty of NAFTA negotiations on inflation outlook.

The first topic BOC discussed after the policy decision was inflation. The members acknowledged that headline CPI rose to +3% y/y in July. Yet, they attributed that strong result to “a jump in the airfare component”. This is in line with what we mentioned in the preview. BOC expects inflation to return towards +2% in early 2019, as effects of temporary factors (e.g. gasoline prices) fade. While downplaying the jump in headline CPI, BOC reiterated that its core CPI measures remained “firmly around +2%. The members noted that the Canada’s economy has been “operating near capacity for some time”. This is compared with the July statement that the economy is “operating close to capacity”.

The members acknowledged that 2Q18 GDP growth came in stronger than expected. Yet, they judged that the developments remained “in line with the Bank’s July projection for growth to average near potential”. The central bank acknowledged that “the rotation of demand towards business investment and exports is proceeding” and that the housing market is “beginning to stabilize as households adjust to higher interest rates and changes in housing policies”. However, they expect growth to moderate temporarily in 3Q18, driven by “further fluctuations in energy production and exports”.

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On the monetary policy outlook, BOC affirmed that the next move should be a rate hike and the path of normalization would remain “gradual” and data-dependent.
Policymakers have discussed the possible impacts of Canada’s trade relations with the US. They warned of the uncertainty about trade policies that would “weigh on businesses”. They pledged to closely monitor the progress of “NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook”.


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