BoC meet today, decision announced at 1400GMT & accompanied by the July Monetary Policy Report

Prior previews:

This now, via CIBC (bolding mine):

We were way above market expectations for the path of overnight rates in Canada two months ago. But in the scramble to respond to the abrupt shift in the Bank of Canada's tone, we were left a bit behind.

  • In part, that reflected the way we think about our role. A forecaster's job is to be the fully informed tout that tells you which horse to bet on in the Kentucky Derby. If you followed his advice, and bet on number 7, what help is it to you for the tout to point out, with three strides to go, that it looks like number 3 is going to win?
  • We had earlier called for a rate hike in October, expecting the Bank to use this month's policy report to set the stage, and this late in the game, opted to hang on to that call until we had the jobs data in hand. That said, after the upside surprises in both manufacturing exports and employment reported this week, we've thrown in the towel.

Look for a 25 bp hike by the BoC ... with a further 25 bps in the fourth quarter of the year.

Should the Bank hike rates?

  • Yes, for the reasons we outlined in mid-May. By then, it was apparent that, in contrast to what the BoC was then arguing, the Canadian labour market was not that far behind the US in getting to full employment. Inflation is still muted, but if the economy doesn't need rates this low to make solid progress, for financial stability reasons, we shouldn't have rates this low. Why encourage excesses of debt, and add to the risks that rate hikes down the road will lead to unpleasant surprises for the household sector? We'll trade off a bit of a delay in getting to 2% inflation if that gives sufficient benefits in financial stability.

We caution ... decision is still not quite a sure thing.

  • Governor Poloz's communications policy has not been crystal clear in the past.
  • The market didn't pick-up on a subtle clue by a Deputy Governor and failed to expect the first rate cut in 2015, got it right in anticipating a second cut in the middle of that year, but priced-in a rate cut that didn't end up happening in early 2016.

As for what's next, a second hike in the final quarter of the year will likely see the overnight rate back to 1%.

  • Since the Fed will also be hiking in Q4, we should be done with the lift to the Canadian dollar from the change in Bank of Canada policy.
  • In 2018, look for only a slow crawl higher from both central banks, with a hike every six months or so.
  • Moderate inflation gives monetary policymakers the luxury to watch how the economy copes with higher rates.
  • In Canada, elevated household debt levels, coupled with a tightening in mortgage and housing policy, suggest that fewer rate hikes will be needed than in the past to cool the economy's fires.