How y’all doing, forex buddies? As expected, the Bank of Canada (BOC) kept the overnight rate at 0.50%. There was no press conference this time around, but we had the usual press statement and that was enough to get a major reaction from the Loonie. And if you missed out on what the BOC said yesterday, then here are four key points from the May BOC policy decision and press statement that you have to know about.
1. Q1 growth within expectations
According to the official press statement, the BOC acknowledged that business investment remains weak, but the BOC is confident that Q1 GDP is still growing in line with the BOC’s projections as laid out in its April Monetary Policy Statement, so real Q1 GDP is still expected to have expanded by 1.4% year-on-year, even though trade and consumer spending both took a hit in March, as I pointed out in my most recent snapshot of Canada’s economy.
2. Q2 growth downgraded, but…
The BOC may be confident that Q1 grew in line with its expectations, but it was forced to concede that Q2 growth will likely slow down drastically, shaving as much as 1.25% from its growth projections, which means that Q2 GDP is now only expected to grow by around 0.45% year-on-year (+1.7% previously).
The BOC attributed its downgraded growth forecast to the wildfires that ravaged Canada’s oil-rich province of Alberta, which disrupted oil production and inflicted significant property damage. But on an interestingly more upbeat note, the BOC noted that it expects a rebound in Q3 when reconstruction begins and oil companies restart production.
3. Housing market could be a problem
The BOC noted that “Canada’s housing market continues to display strong regional divergences.” This just means that there are more home sales and construction activity in manufacturing-oriented provinces like Ontario or services-oriented provinces like British Columbia, due to the migration of workers from oil-rich provinces like Alberta.
The stronger housing demand in provinces like Ontario or British Columbia is also being fueled by lower interest rates, which encourages borrowing and causes the balance between household debt to disposable income to become dangerously lopsided and vulnerable to a housing bubble.
And since this divergence didn’t show any signs of letting up, the BOC concluded that “household vulnerabilities have moved higher,” which heavily implies that the BOC does not want to cut rates any deeper since that would only make a housing bubble even more likely.
4. Neutral tone overall (with hints of optimism)
The BOC was expected to keep the overnight rate steady, so no surprise there. Many forex traders and economists were expecting that the BOC was gonna be more dovish in light of recent developments, though, namely the economic damage inflicted by the wildfire.
However, the BOC remained somewhat neutral and even had a glass-half-full outlook with regard to its expectations that Canada’s economy will rebound in Q3 after getting battered in Q2.
The BOC also had a very neutral opinion on the Loonie’s price action, acknowledging that there had been some volatility due to “shifting expectations of US monetary policy and higher oil prices,” but then the BOC simply said that the Loonie “is now close to the level assumed in April.” No jawboning whatsoever.
The Loonie’s reaction
The BOC’s worries over the Canadian housing market, which means that the BOC likely won’t be cutting rates any time soon, as well as its overall neutral tone and lack of jawboning on the Loonie, were taken as positive signals for Loonie bulls, sending the Loonie higher against all its forex peers, as y’all can see on the chart below.