Talk about going against the grain! While most major central banks have shifted to a more cautious monetary policy stance, Bank of Canada policymakers seemed less dovish than usual in their latest rate decision. Governor Stephen Poloz and his men still kept interest rates unchanged at 1.00% but decided to drop the word “neutral” from its policy statement, setting off a sudden Loonie rally.
You see, the BOC has been sitting on its hands for quite some time, refraining from announcing any drastic changes in their economic outlook and even downplaying recent improvements. In fact, in their September policy statement, BOC officials insisted that the strong pickup in inflation was simply spurred by temporary factors rather than actual economic progress.
This explains why most forex traders were caught off guard (myself included!) when the BOC sounded more upbeat, as it decided to upgrade its quarterly core inflation forecast from 1.8% to 2.1%. Apart from that, the BOC also dropped the line on how the central bank “remains neutral with respect to the next change to the policy rate; its timing and direction will depend on how new information influences the outlook and assessment of risks” and just said that “the balance of risks falls within the zone for which the current stance of monetary policy is appropriate.”
In addition, BOC policymakers acknowledged the strength in the housing and automobile industries, along with the potential positive contribution of government spending to growth. For them, improving prospects in the U.S. economy would also continue to support growth in Canada, particularly in the exports sector.
Of course not all was fine and dandy, as the BOC expressed concerns about the looming euro zone recession and the ongoing slowdown in Japan. Shaky financial confidence all over the world, persistent geopolitical risks, and falling oil prices were also part of their list of worries.
Unfortunately for forex market participants who were hoping to hear more details on the BOC’s economic assessment and monetary policy bias, the central bank’s press statement was canceled because of the shooting incident and lockdown at Parliament Hill. With that, analysts are left with no choice but to read between the lines of the actual announcement and try to figure out whether the BOC is really turning more hawkish or not.
Some argue that it’s too soon to say that the BOC is moving closer to a rate hike, as the general tone of their statement is still neutral. Even though a few economic risks have subsided, new concerns have popped up, keeping policymakers in a wait-and-see mode. Do you think the BOC might be ready to hike rates by next year?