As widely expected, the Bank of Canada held its key monetary policy interest rate at 1.00% this morning, with the accompanying statement striking a dovish tone.
The economic backdrop appears to be evolving in line with the Bank's expectations at the time of the October Monetary Policy Report, although 'considerable uncertainty' still clouds the global outlook.
The Canadian economy is also seen as falling in line with their expectations, with 'very strong' employment growth noted, as well as robust consumer spending, ongoing contributions from business investment, and more evidence that public infrastructure spending is having a rising impact on growth. Although exports disappointed in the third quarter, the Bank noted that the latest trade data supports the view that exports are likely to make a positive contribution to growth going forward.
On the inflation front, slightly higher than anticipated price pressures are seen as being helped by temporary factors (notably gas prices), but core inflation has also ticked up in line with 'continued absorption of economic slack'.
On the downside, the Bank continues to see "ongoing - albeit diminishing - slack in the labour market", while noting that employment continues to rise alongside participation rates.
The final section of the statement struck a somewhat dovish tone. It was noted that higher rates will likely be required over time, but the Governing Council will be 'cautious, guided by incoming data", pointing again to the key areas of the Bank's focus in recent quarters: the economy's sensitivity to interest rates, the evolution of economic capacity, and the dynamics of wage growth and inflation.
If it weren't for the final section of the statement, this would have looked like a central bank getting ready to hike. With developments since their October Monetary Policy Report in line with their expectations, by their own assessment the economy is likely entering excess demand, which would typically call for a monetary policy response.
Indeed, most, if not all of the tick-boxes that the Bank has identified appear to be getting ticked: employment growth remains robust, wages continue to accelerate by almost all measures, and consumer spending has remained healthy despite rising borrowing costs with the most recent aggregate employee compensation data reported the strongest quarterly gain since late 2014. This latter point should help reduce the sensitivity of the economy to rising rates - it's easier to deal with a potential rise in debt service costs if you're also making more money. It is also becoming increasingly difficult to identify the labour market slack that once again seems to be a key factor in the Bank's decision making.
Ultimately, it is the Bank's risk management framework that appears to have ruled the day. Despite things seeming to line up for further near-term tightening, Governor Poloz has chosen to maintain his optionality. With economic growth appearing likely to exceed the Bank's 2.5% expectation for the fourth quarter of this year, things continue to point to a hike sooner rather than later. However, as today's statement shows, nothing is a done deal until the day of the decision.