Today the Bank of Canada rose rates as expected but surprised with some hawkish signals. Analysts at CIBC, see there’s nothing in the evidence to support what was a much more hawkish tone from the BoC on what lies ahead.
Key Quotes:
“Sorry, but we don’t get it. The case for a quarter point Bank of Canada rate hike today wasn’t hard to make. The economy sits at full employment, and core inflation is at the targeted 2% pace. But other than reaching a trade deal that was no better than markets were already assuming was coming (as evidenced by the absence of a sustained Canadian asset rally in its wake), there’s nothing in evidence to support what was a much more hawkish tone from the central bank on what lies ahead.”
“In the Bank’s own estimate, year-on-year growth will have trended at 2.0% as of the third quarter of this year, and also at 2% in the last half of 2018. The central bankers see the need to slow growth by a single decimal place to 1.9% by 2020 to contain inflation. So where’s the case for a lot more rate hikes ahead?”
“Certainly, there will be more odds placed on a follow-up hike in December and a faster pace in 2019. That said, we’re not jumping to change our call, which has the Bank hiking only one more time (perhaps two if we get a lot of pre-election fiscal easing from Ottawa), because we are simply not nearly as optimistic as the Bank of Canada on the degree of tightening that the economy can live with and still grow by 1.9% next year.”
“The market will run with the view that December is a “live” meeting with a decent chance of a rate hike, and will be tempted to pile on more rate hikes into the 2019 view. So today’s news was bearish for fixed income markets and bullish for the Canadian dollar. But remember, at the end of the day, the Bank of Canada is still promising to let the economic data do the talking in terms of the number of rate hikes ahead and their timing. If, as we expect, growth doesn’t accelerate and remains near potential in 2019, and wages and price inflation remain benign at a policy rate close to 2%, that’s where we will end up.”
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