Josh Nye, Senior Economist at RBC Capital Markets, points out that the tone of the Bank of Canada was more hawkish than expected today. The central bank rose rates (as expected) and no mentioned that interest rates will have to rise to a “neutral stance” to keep inflation on target.
Key Quotes:
“Today’s rate increase was unanimously expected and fully priced in by markets, but once again the Bank of Canada managed to keep things interesting. To emphasize that monetary policy is not on a pre-set course, Governing Council no longer indicted rate hikes will be “gradual”. The bank wants to maintain flexibility given two-sided risks to the economic outlook.”
“Their guidance on the pace of rate hikes was less explicit, the destination is now clearer: the overnight rate “will need to rise to a neutral stance” to keep inflation on target. We think that is a more hawkish signal than simply dropping “gradual” would have been. Currency markets agreed, sending the Canadian dollar half a cent higher following the announcement.”
“Our current forecast assumes two further rate increases in the first half of 2019, followed by a pause that would leave the overnight rate at 2.25% until the end of next year. That is slightly below the BoC’s assumed 2.5-3.5% range for the neutral rate.”
“Their forward guidance suggests upside risk to our forecast, though there was no indication of when monetary policy needs to be back to neutral.”
“We think a move in December is unlikely, but the BoC’s more hawkish tone today gives a strong indication that rates will rise again early next year.”
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