Highlights of the Bank of Canada decision on September 5, 2018:

  • The OIS market was pricing in just a 3% chance of a hike before the decision

  • One of 21 economists surveyed were forecasting a hike

Statement:

  • Recent data reaffirm forecasts

  • Says we will continue to take a gradual approach, guided by incoming data

  • Core inflation measures remain 'firmly around 2', consistent with an economy that has been operating near capacity for some time

  • US economy is particularly robust

  • Canadian GDP expected to slow temporarily in Q3, mainly due to energy

  • Although CPI was higher than expected, it should move back towards 2%

  • Elevated trade tensions remain a key risk to the global outlook and those tensions pulling some commodity prices lower

  • Financial stresses have intensified in some emerging markets but spillovers so far limited

  • Housing market activity is beginning to stabilize

  • Gains in employment and labor income are helping to support consumption

  • Gauging economy's reaction to higher rates and also looking closely at NAFTA talks and their impact on the outlook

Note: There is no press conference after this decision but Wilkins is delivering a speech tomorrow.

The old line on guidance was this: "Governing Council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data. In particular, the Bank is monitoring the economy's adjustment to higher interest rates and the evolution of capacity and wage pressures, as well as the response of companies and consumers to trade actions."

The new line is this: "Recent data reinforce Governing Council's assessment that higher interest rates will be warranted to achieve the inflation target. We will continue to take a gradual approach, guided by incoming data. In particular, the Bank continues to gauge the economy's reaction to higher interest rates. The Bank is also monitoring closely the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook."

It basically speaks for itself. There worries about wages have diminished but they're still trying to understand the impact of higher rates and they're especially worried about NAFTA. The takeaway is that if NAFTA goes awry or if the US and China find themselves in a full-blown trade war, then the BOC is going to pause.

There was a chop in USD/CAD around the decision but there has been nothing lasting.