Tomorrow at 2:00 pm GMT the Bank of Canada (BOC) will publish its monetary policy decision for the month of October. Will it raise its rates for a third time this year, or will BOC members take a chill pill this time around?
What happened last month?
Unless you were too busy posting your reactions on the new iPhone 8 and iPhone X last month, you should know that the BOC had a surprise of its own when it raised its rates for a second time this year. It increased its overnight rate target to 1.00%; raised the bank rate to 1.25%, and upped its deposit rate to 0.75%!
In its statement BOC repeated that “removal of some of the considerable monetary policy stimulus in place is warranted” thanks to Canada’s growth that’s “becoming more broadly-based and self-sustaining.”
The central bank cited a robust consumer spending; strong business investment and exports, and a cooling housing sector that all contribute to a “level of GDP is now higher than the Bank had expected.”
It also repeated its lack of concern over weak inflation, saying that “it has evolved largely as expected in July” and that the increase in its core inflation measures reflect the “dissipating negative impact of temporary price shocks and the absorption of economic slack.”
Despite these, the central bank cautioned that “significant geopolitical risks and uncertainties” remain and that “wage and price pressures are still more subdued than historical relationships would suggest.”
While the prospect was already on the table, the actual rate hike took some traders by surprise and caused the Loonie to bounce higher across the board.So, what are market players expecting this time around? A quick look around the fx hood shows that traders are pricing in only about 20% – 40% chance that BOC Governor Stephen Poloz and his gang would raise rates for a third time this year.
Here are 6 reasons why we probably won’t see another rate hike from BOC this week:
1. More “temporary” weakness in inflation?
Last Friday we saw Canada’s headline CPI miss for the month of September, while annualized CPI clocked in at 1.6%.
1.6% may mark the fastest CPI rate since April, but it also falls short of analysts’ expectations of a 1.7% uptick. What’s more, removing the rise in gasoline prices shows consumer prices barely moving higher from their July and August readings. That’s not exactly “temporary,” is it?
For reference, BOC is targeting a CPI range of 1.0% to 3.0%.
2. Weak consumer spending numbers
Last month BOC was upbeat about consumer spending, saying that solid employment and income growth have kept consumer spending “robust.”
Well, that wasn’t the case in August when Statistics Canada printed a 0.3% decline in retail sales against expectations of a 0.5% increase. Even worse, 8 of the 11 retail store types reported declines in sales, which is why the core reading slumped by 0.7% instead of increasing by 0.3% as expected.
3. Wider trade deficit
Canada’s trade deficit widened from 3.0 billion CAD to 3.4 billion CAD in August instead of narrowing to the estimated 2.6 billion CAD shortfall.
Improvements in 6 out of 11 sectors didn’t stop exports from falling by 1.0%, its third consecutive decrease. Heck, the annualized 0.2% decline marks the sharpest decrease since February 2016! Meanwhile, August imports are unchanged at 47.0B CAD following a largest-decline-since-January-2009 fall in July.
Weaker export numbers in Canada underscore concerns of some BOC officials that the Loonie’s strong exchange rate needs watching over. And unless we’re living in The Upside Down, a rate hike isn’t exactly the best way to weaken the Canadian dollar.
4. Eyes on household indebtedness
After raising their rates twice, even Poloz and his team would likely step back and assess the impact of their recent changes. In fact, BOC ended last month’s statement with:
“…given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.”
And, unfortunately for BOC, households have yet to keep up. A survey from MNP Ltd., Canada’s biggest insolvency firm, showed that a growing number of Canadians might balk at more rate hikes with as many as 42% saying that they’re $200 or less away from not being able to pay their bills and debts each month.
5. Better housing market conditions
The Office of the Superintendent of Financial Institutions (OSFI), Canada’s banking regulator, announced another tightening of Canada’s mortgage rules. A pretty steep price considering that the greater Toronto and Vancouver regions have also just released new tax rules (read: more) for foreign buyers.
Meanwhile, a six-month moving average of housing starts finally started trending lower in September after trending higher for eight consecutive months.
6. NAFTA uncertainty
Back in September BOC members cited “significant geopolitical risks and uncertainties around international trade and fiscal policies” as one of the reasons why the Loonie has appreciated across the board.
Now that NAFTA negotiations have been put on hold until the start of next year, BOC members can pay more attention to domestic indicators. Unfortunately, the extension of uncertainty around future trade conditions would make it even harder for BOC members to commit to another rate hike.
Does this mean that we won’t see any action from BOC?
Not necessarily. For one thing, a no-rate-hike decision isn’t a done deal. Canada’s latest employment numbers, for example, still point to growth in both full-time jobs AND wages, which still support BOC’s optimism that improvements in the labour market would soon translate to higher consumer spending.
And then there’s a lack of clues from BOC members. While some of them have shared their concerns over household indebtedness and a strong Loonie, they also haven’t explicitly shared their policy biases. Heck, Poloz himself took pains to communicate his neutral bias, saying that (emphasis mine):
“At a minimum, that additional stimulus is no longer needed. But there is no predetermined path for interest rates from here.
Monetary policy will be particularly data dependent in these circumstances and, as always, we could still be surprised in either direction.“
Take note that these six factors on their own may not necessarily sway BOC members to keep rates steady, but altogether they lessen the pressure for central bank members to tighten their policies for another time this month.
If BOC members decide to carry on with their tightening, then today’s low odds will translate to sharp intraday uptrends for the Loonie tomorrow. But if they choose a wait and see approach before making any more changes, then keep your eyes peeled for any changes to their growth and/or inflation biases.
Either way, y’all better keep your eyes glued to the tube during the event! And remember that if you’re not comfortable trading the news, then you can always choose to stay in the sidelines.