BoC Assessment – January 9

A gradual pace of normalization is supported by the December announcement, which revealed a less optimistic view on growth amid likely material weakness in energy and an increasing weight from trade conflicts on global demand.

In October, the Bank dropped “gradual” from the final paragraph as they did not want to give markets the idea that rate moves could only happen at every other announcement. Meanwhile, December’s s announcement did not bring back “gradual”, but the less upbeat outlook for growth alongside well contained core inflation will keep BoC on hold tomorrow.

Inflation has been evolving as expected and the Bank’s core measures are all tracking 2 per cent, consistent with an economy that has been operating close to its capacity.

Total CPI revealed the as expected 0.4% m/m drop in November to a slightly weaker than anticipated 1.7% y/y pace. The more prominent development was that all three core CPI measures came in at a 1.9% y/y growth, adding to the backing for no change in rates from BoC in January and March.

The tumble in crude oil prices remains a headwind to Canada’s 2019 growth prospects. Granted, BoC was clear that they view the current swoon in oil prices as less severe in terms of the growth implications relative to the 2014/15 oil price plunge that prompted two 25 bp rate cuts.

Policy normalization remains the base-case scenario, but recent data and events suggests they may need to wait until April of 2019 at the earliest to further lift rates.

“Governing Council continues to judge that the policy interest rate will need to rise into a neutral range to achieve the inflation target.”. “the appropriate pace of rate increases will depend on a number of factors.”

With oil prices “materially weaker than expected,” and  trade exerting a larger drag on global demand, futures now have around a 40% chance for a January hike versus 55% ahead of the announcement.

As for the remainder of next year, two rate hikes for 2019 have been penciled (was three 25 bp hikes) as the economy grapples with likely materially weaker energy sector activity.  This would be below the 2.50% to 3.50% neutral range identified by BoC.

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Andria Pichidi

Market Analyst


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