The market was thrilled by BOC’s hawkish comments accompanying the widely-anticipated +25 bps rate hike. With the uncertainty of future trade relationship with the US reduced and economic growth on track, the members judged that it is prudent to move to “neutral” interest rate. Removal of the “gradual” rate hike reference, replacing by “need to rise to a neutral stance”, might be a signal that BOC would increase the policy rate at a faster pace. Policymakers noted weakness in inflation. Yet, they expect wage growth would pick up in coming quarter and would likely help boost inflation.
With Canada and US agreed on a new deal, USMCA, on September 30. Much of the uncertainty refraining BOC from rate hike has reduced. BOC noted that “the projections for business investment and exports have been revised up, reflecting the USMCA and the recently-approved liquid natural gas project in British Columbia”. It added that further monitoring is needed with regard to “the extent to which the USMCA leads to more confidence and business investment in Canada”.
On the macroeconomic development, the members took note of the slowdown in inflation. The members judged that it was driven by dissipation of temporary factors that had pushed the price levels higher. Wage growth has been tepid. Yet, the members expect it would “pick up in the coming quarters”. On the updated economic projections, overall GDP forecasts were little changed, with growth of +2.1% expected this year and in 2019, followed by +1.9% in 2020. CPI forecast is unchanged at 2.4% this year. However, forecasts for both 2019 and 2020 are revised lower to 2%, from +2.2% and +2.1%, respectively.
On the monetary policy outlook, BOC indicated that the policy rate would to need to “rise to a neutral stance to achieve the inflation target”. Meanwhile, the members would monitor the situation regarding how “economy is adjusting to higher interest rates, given the elevated level of household debt”. This marks a change in stance from previous meetings in which the statement affirmed “a gradual approach” of rate hike which is “guided by incoming data”.