I greatly under-estimated the confidence of the Bank of Canada (BoC) when I mapped out the possibilities for a currency market that highly anticipated a rate hike from the Bank.
In its latest statement on monetary policy, the BoC increased its target for the overnight rate by 25 basis points (bps) to 0.75%. The Bank cited its growing confidence in the Canadian economy:
“Recent data have bolstered the Bank’s confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy. The Bank acknowledges recent softness in inflation but judges this to be temporary. Recognizing the lag between monetary policy actions and future inflation, Governing Council considers it appropriate to raise its overnight rate target at this time.”
The opening statement to press conference elaborated on this confidence:
“Since April, we have also seen further evidence of a broadening of growth in Canada. Along with stronger-than-expected growth, this has bolstered Governing Council’s confidence in the outlook for the economy and inflation. The economy is absorbing excess capacity more rapidly than we projected in April, and it now appears that the output gap will close around the end of this year.”
This brimming confidence came through during the questioning in the Q&A period as well.
I was initially focused on the Bank’s reduced expectations for GDP growth: “The Bank estimates real GDP growth will moderate further over the projection horizon, from 2.8 per cent in 2017 to 2.0 per cent in 2018 and 1.6 per cent in 2019.” I also took note that the BoC seemed a bit wary of the potential impact of higher rates on the economy (part of my original expectation): “Governing Council acknowledges that the economy may be more sensitive to higher interest rates than in the past, given the accumulation of household debt. We will need to gauge carefully the effects of higher interest rates on the economy.”
Leave A Comment