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BOC Preview – Rate Hike Fully Priced but Future Decision Still Data- Dependent

The market has fully priced in that BOC would raise its policy rate by +25 bps to 1.75% this week. With Canada-US trade uncertainty eased and the employment market staying strong, the focus is on whether policymakers would consider accelerating the pace of normalization. Notwithstanding a rosier picture, the members would at most be cautiously optimistic, retaining the stance of gradual and data-dependent tightening.

The October statement is accompanied by a press conference and updated economic projections. For the latter, GDP growth forecasts could be upgraded as the market’s expectations of third quarter growth almost a percentage point above the central bank’s+1.5% forecast.

The NAFTA deadlock is considered resolved with Canada joining the US-Mexico trade deal with some amendments. Notwithstanding the criticism, the preliminary trilateral USMCA the market has been thrilled since its announcement earlier this month. Bets for a rate hike this month quickly surged while hopes for more hikes next year’s loomed. Undoubtedly, the biggest hurdle to rate hike has cleared for BOC.

Over the previous meetings, BOC had warned of the cloudy outlook of trade policy, noting that “uncertainty about trade policies continues to weigh on businesses” and “the Bank is also monitoring closely the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook”. We expect these references could be changed at the October meeting.

On the macroeconomic developments at home, the job market remains strong. The number of payrolls increased +63K in September, resulting in a lower unemployment rate of 5.9% (compared with 6% in August). The details of the employment report were mixed though. While it is encouraging that the unemployment rate slipped despite an increase in participation, all of the increase in payrolls came from part time job (+80K), while full time employment actually fell -16.9K.

Headline CPI fell to +2.2% y/y in September from +2.8% a month ago, while core CPI also eased tom +1.5% from +1.7%. The slowdown in headline was more remarkable as the rally of gasoline price moderated. BOC’s preferred inflation measures (trimmed, median and common CPI) continued to stay around +2%.

Despite a mixed employment market and moderating inflation in September, clarity of the trade relationship with the US still warrants a rate hike in October. Indeed, if macroeconomic developments continue to evolve according to BOC’ projections, two more rate hike a probably justified in 1H19. Hawks have been suggesting a change in BOC’s forward guidance, which indicates “a gradual” monetary policy approach “guided by incoming data”. We expect the central bank would avoid being overtly optimistic and retain the language.

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