How y’all doing, forex friends? The Bank of Canada (BOC) decided to maintain the overnight rate at 0.50%, but the Loonie got slammed by sellers.
What’s up with that?
Well, here are the major highlights from the BOC Statement and presser that you need to know about.
1. 2016 CPI downgraded, but 2017 CPI upgraded
The BOC downgraded its inflation forecast for 2016 from a year-on-year increase of 1.7% to just 1.4%. According to the BOC, the downgrade mainly reflects “weaker-than-expected food prices.”
But as I noted in my latest Economic Snapshot for Canada, Canada’s CPI grew by 1.2% year-on-year in November, which is the weakest reading in 31 months. The BOC’s 1.4% projection by December is therefore actually an acceleration from November’s very poor reading.
On an even more upbeat note, the CPI projection for 2017 got upgraded from 1.9% to 2.1%, “as the offsetting effects of higher consumer energy prices and lower food prices dissipate and economic slack is absorbed.”
So far, so good, right? Well, it goes downhill from here.
2 .GDP growth projections upgraded, but…
Canada’s Q3 GDP grew at a faster-than-expected pace, but the BOC warned that GDP growth will slow down in Q4, at least on a quarter-on-quarter basis, as “the temporary factors that spurred activity in the third quarter of 2016 dissipate.”
Year-on-year, however, the BOC upgraded its 2016 GDP forecast from 1.4% to 1.6%. The BOC also upgraded its 2017 forecast from 2.2% to 2.3% while the projection for 2018 was unchanged. And according to the BOC, growth in 2017 and 2018 would be fueled mainly by household spending.
The BOC also expects a “modest expansion” in investment and exports. But with regard to exports, the BOC warned that “Export growth will be limited by the recent appreciation of the Canadian dollar, alongside that of the US dollar, vis-à-vis most other currencies.” In short, the BOC thinks that the Loonie is too strong.
But despite the growth upgrades, the BOC also warned that “the outlook needs to be viewed in the context of elevated policy uncertainty at the global level,” especially from the U.S., Canada’s main export market.
3. BOC worried about “protectionist” U.S. trade policies
The BOC admitted that it’s not sure how Trump’s fleshed out trade policies will turn out, but it warned that “the protectionist tilt is already evident.”
Aside from its expected negative impact on Canadian exports and business investments (Canada is part of NAFTA after all), the BOC argues that a “protectionist” U.S. trade policy could also “weigh on the global economy by dampening global trade and economic growth.”
4. BOC worried about rise in global bond yields
The BOC is worried that the rise in bond yields of developed economies, particularly the U.S., may continue to siphon capital away from EMEs (emerging market economies).
This could ultimately drag down the global economy, the BOC says, which would then also drag down the Canadian economy with it.
5. BOC sees even more uncertainty
According to the BOC’s Monetary Policy Report, “risks to the projected path for inflation are roughly balanced.” However, the report acknowledged that “the outlook is subject to considerable economic and geopolitical uncertainty.” And we already discussed some of them.
In addition, BOC Governor Stephen Poloz was noticeably more dovish during the presser, particularly with regard to the U.S. elections. See for yourself (emphasis mine):
“Back in October we identified a number of things which were raising uncertainty beyond the normal level of uncertainty that we would normally deal with, and so at that point we decided we did not have sufficient information to take further monetary action at that time, given those uncertainties. And I’m arguing that in the post election period uncertainty remains undiminished and that’s a conservative statement. On many fronts, arguably, it has increased.”
6. BOC now has an easing bias?
BOC Governor Stephen Poloz was asked during the presser if the BOC was “on track” for a potential rate hike before the U.S. elections. And Poloz simply answered “no”.
However, when Poloz was later asked about the likely future path of monetary policy, he said the following (emphasis mine):
“Should any of those downside risks materialise and put our inflation target at risk then we would have the room to maneuver. So, in that context, especially with inflation having been below target for a prolonged period, yes, a rate cut remains on the table and it would remain on the table for as long as downside risks are still present.”
The downside risks that Poloz mentioned here, according to the BOC Monetary Policy Report, are the following:
- A “protectionist” U.S. trade policy (as discussed earlier)
- Sluggish business investment in Canada persists, hurting growth and inflation
- Potentially weaker household spending due to high levels of household indebtedness
- Investment outflows from EMEs that may result in slower global and Canadian growth
7. Rate cut not needed yet, though
During the presser, BOC Governor Stephen Poloz was also asked if rate cuts were discussed during the January meeting. And Poloz answered as follows:
“I am not surprised to hear you ask. We are quite open about it. We are in that ball park, where it would be nice if this thing went a little faster, but there are things that are coming. In particular, the infrastructure program which is well under way, should begin showing up in the data and that is going to be another key piece of reassurance as we go along.”
By the way, Poloz is referring here to Canadian PM Justin Trudeau’s infrastructure program.
Given the recent, positive economic developments in Canada, expectations were high that the BOC would maintain a neutral tone, or even be more upbeat.Instead, the BOC was rather dovish, and BOC Governor Poloz even hinted that the BOC now has an easing bias.
In fact, the Loonie’s slump started accelerating shortly after Poloz said that “a rate cut remains on the table.”
Some market analysts are even saying that the BOC is likely signaling that it’s open to using unconventional monetary policy tools (such as QE or negative rates), given that the overnight rate is close to zero.
Anyhow, it should also be noted that the Loonie also likely got dragged lower by the convenient (for Loonie bears anyway) slide in oil prices at the time, as you probably saw on the chart earlier. And market analysts attributed yesterday’s slump in oil prices to renewed oversupply worries due to higher U.S. oil output.