BoC holds rates steady but strikes a cautious tone

Following the BoC’s announcement, the Canadian dollar fell. The markets looked through the BoC’s statement which said that “higher interest rates will likely be required over time.” While the hawkish statement was expected to offset the dovish tone from the BoC, investors sold off the Canadian dollar

Bank of Canada

By Vince De Castro, Head of Marketing, Orbex

The Bank of Canada held the overnight rate steady at 1.0% as widely expected at the monetary policy meeting held last week. The central bank reiterated in its statement that officials will remain cautious in shaping the future course of rate decisions.

The decision to hold rates steady comes after the Bank of Canada turned hawkish earlier this year. While the markets were expecting to see a gradual rate hike, the Bank of Canada hiked rates twice this year already.

Expectations for a third rate hike also increased however, with the uncertainty surrounding the NAFTA deal as well as the Canadian exports getting hit due to a higher exchange rate, the expectations for rate hikes started to fall.

BoC: Wage growth and inflation dynamics to be key

The central bank said that focus remains on the household response to the previous two rate hikes earlier this year. Wage growth and inflation dynamics as well as the output remained one of the key factors for central bank officials going forward.

Despite the dovish tone from the Bank of Canada, the central bank’s statement highlighted the growth in the Canadian economy. The central bank said that exports which fell sharply during the third quarter could see growth resuming. This comes after the central bank assessed the trade data for October. The stimulus package via the infrastructure spending was also seen to be showing signs of contributing to the economy.

This was underlined by the fact that consumer spending was healthy in the third quarter, supported by an increase in wage gains and business investment. The central bank said that the above factors helped to contribute to growth after a solid performance in the first half of the year.

BoC urges patience as higher rates likely over time

Following the BoC’s announcement, the Canadian dollar fell. The markets looked through the BoC’s statement which said that “higher interest rates will likely be required over time.” While the hawkish statement was expected to offset the dovish tone from the BoC, investors sold off the Canadian dollar.

The U.S. dollar gained, partly led by stronger than expected private payrolls data. The FOMC meeting due this week is also expected to see the Fed hiking interest rates by 25 basis points as well.

Analysts noted that despite the hawkish statement, the BoC could be expected to hike rates just two more times next year. According to the chief economist at CIBC World Markets, the BoC did not delve much into the recent jobs report. Canadian unemployment rate was seen falling to 5.9%. This was stronger than the forecasts of 6.2% and down from 6.3% previously.

The Canadian economy also added 79.5k jobs beating estimates of 10.2k and more than doubled from the 35.3k headline jobs that were seen the previous month. The monthly GDP data also showed a modest rebound with growth seen rising 0.2% after previous month’s decline of 0.1%.

The economists are expecting that while the central bank could hike rates next year, the timing of the rate hikes remained inconclusive. This led many to expect that the BoC’s rate hike could be subject to the trade balance as well as the exchange rate.

Inflation remains one of the key worries for the central bank which could also be impacted by a stronger exchange rate; something that the BoC is not expected to tolerate. The moderation in the Canadian dollar is however expected to offset the impact from the previous quarter.

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