Tomorrow at 3:00 pm GMT we’ll see the Bank of Canada (BOC)’s policy decision for the month of January.
Will bank members start the year with a rate hike? Or will they keep their rates steady for another month after raising rates twice last year?
What happened last time?
As expected, Governor Stephen Poloz and his team kept interest rates steady at 1.00% in December.
While they believe core inflation has gone up and that employment conditions have improved, they also felt that “other indicators point to ongoing – albeit diminishing – slack in the labour market.”
BOC members shared that “While higher interest rates will likely be required over time, Governing Council will continue to be cautious” in their next decisions. Gov. Poloz further stressed the point in the presser when he mostly shrugged off Canada’s economic improvements.
He recognized that “tremendous progress over the past year, and it is close to reaching its full potential” but warned that he and his team would also consider other uncertainties (read: NAFTA, labour market slack, etc) in setting their next policies.
How did the Loonie react?
Poloz’ presser was less hawkish than analysts had expected, which was why the Loonie dropped like a rock across the board. Just take a look at Pip Diddy’s chart from his currency recap that week!
What are market players expecting this time?
Will market geeks have better luck this time around? See, they’re back to expecting a 25-basis point rate hike that would take BOC’s rates to 1.25%.
And why not? Since the last statement Canada has published one strong economic report after another.
Consumer prices, for one thing, have shot up by a nice 2.1% from a year earlier in November. Core inflation also got a nice bump from 0.9% to 1.3%, while 2 out of 3 of BOC’s preferred measures of inflation also showed higher growth.
Retail sales is another source of confidence especially after it printed a 1.5% growth in October when market players were only expecting a 0.3% bump after September’s 0.2% increase.
Last but definitely not the least is Canada’s labour market, which showed a lower unemployment rate (5.7% from 5.9% in November) and 79,000 net jobs added in December.
A rate hike is not set in stone, however. For one thing, inflation is still a couple of ticks away from BOC’s 2.0% target. In addition to that, a closer look at the latest employment report shows that 54,900 out of 79,000 jobs are part-time work, which still validates BOC’s concern that there’s still significant labour market slack.
And then there are concerns over the Donald pulling the U.S. out of NAFTA. While the White House has already proposed an extension of the negotiations, the Loonie’s violent reaction to the prospect alone should be enough to concern any central bank.