HomeContributorsFundamental AnalysisBank of Canada Remains Wary

Bank of Canada Remains Wary

  • Bank monitoring risks to outlook given uncertainties about developments abroad
  • These risks and slack in the domestic economy means current policy stance still appropriate

As-expected, the Bank of Canada held the overnight rate steady at 0.50% today. Recent developments appear to align with the Bank’s base case forecast with global growth strengthening. In Canada, the Bank noted that recent data point to the economy growing at a slightly stronger pace than its 1.5% forecast. While the headline inflation rate rose in January, this reflected temporary effect of rising energy prices that in part rose because of the implementation of carbon pricing measures in Alberta and Ontario. As such the Bank said it is "looking through these effects" and noted that the core prices measures substantiate that the economy continues to run with "material excess capacity."

Our Take:

While financial markets debate the timing of the next hike by the US Fed, there is little anticipation that the Bank of Canada will move off the sidelines. The Bank’s uneasiness about the global economic outlook and policy developments in the US were noted again today’s brief statement. The Committee reiterated that there is slack in the domestic labour market pointing to the slow pace of wage gains and hours worked as evidence. The Bank also remains concerned about exports which they say continue to face "competitiveness challenges."

Despite presenting an upside risk to the fourth quarter’s growth forecast, the tone of the statement seems lukewarm about the economy given the focus on the persistence of excess capacity and pressures on exports. This did little to alter the market’s assessment that there is about only a one in three chance that the Bank will hike rates late this year.

Our forecast is that Canada’s economy will grow at faster pace this year. We expect tomorrow’s Q4 real GDP report to confirm the economy grew at a 1.8% annualized pace with a 0.2% increase in December providing a solid handoff to 2017. That momentum combined with mild recovery in the oil & gas sector will be sufficient to offset any weakening in the housing market and keep the economy growing at an above-potential pace. Against this backdrop, underlying measures of inflation are forecast to gradually increase to 2%. In the near term however uncertainty about potential policy initiatives by the new US Administration and their impact on Canada sets up for the Bank to stay on the side-lines.

RBC Financial Group
RBC Financial Grouphttp://www.rbc.com/
The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

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