Despite BOC’s effort to temper the need of a rate cut, the market is obviously unconvinced. Market participants continue to price in about 30% chance of rate cut later this year and USDCAD surged to the highest level since January. The key message from the meeting is that the slowdown in the beginning of the year was driven by temporary factors and members saw improvements in the economy since the previous meeting. Yet, while staying positive about domestic outlook, risks in the external environment heightened. Current momentary stance is appropriate against this backdrop while the policy decisions in the future are data-dependent. BOC in May left the policy rate unchanged at 1.75%.

The central bank remained confident about the domestic economic outlook. As noting the policy statement, the members suggested that “recent Canadian economic data are in line with the projections” in April with “accumulating evidence that the slowdown in late 2018 and early 2019 is being followed by a pickup starting in the second quarter”. They expect to “a pickup in both consumers spending and exports” in 2Q19 and acknowledged that “overall growth in business investment has firmed”. On a no-so-positive note, “inventories rose sharply in the first quarter, which may dampen production growth in coming months”. There was little reference to inflation, which BOC judged as “evolved in line with the Bank’s April projection”. It continued to expect inflation to “remain around the 2% target in the coming months” while “core inflation measures all remain close to 2%”.

Globally, the key uncertainty comes from US-China trade war. BOC suggested that “trade restrictions introduced by China are having direct effects on Canadian exports”. On a positive noted, “the removal of steel and aluminum tariffs and increasing prospects for the ratification of CUSMA” would be helpful for exports and investment in Canada.

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The forward guidance came in largely in line with our expectations. While refraining from the comment that interest rate would need to increase, BOC also attempted to temper market speculations that a rate cut would be needed. BOC concluded that recent slowdown in the economy was driven by “temporary” factor, while “global trade risks” have undeniably increased”. Policymakers judged the “degree of accommodation being provided by the current policy interest rate remains appropriate”, while they pledged to monitor incoming data on future adjustment of the monetary policy.

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