Overall, the Bank of Canada is likely to maintain its call that inflation risks are tilted to the downside, while financial stability risks are likely to ease slightly given the tightening of mortgage rules. A more dovish stance has, however, been priced in and the central bank is unlikely a signal of near-term rate cut. There is scope for slightly greater confidence in the growth outlook with potential Canadian buying on any initial dips.
The Bank of Canada will announce its latest monetary policy decision on Wednesday. The consensus expectation is for rates to be left on hold with none of the major investment banks forecasting a change in rates at this meeting.
The central bank will present its latest more detailed Monetary Policy Report at this meeting and there will also be a press conference from Bank of Canada Poloz following the policy decision.
There is likely to be a focus on three key areas in the statement, with inflation being the prime focus.
There was a shift in the September Bank of Canada monetary policy statement with comments that ‘on balance risks to the profile for inflation’ have tilted somewhat to the downside since July.
The latest inflation data was also significantly weaker than expected with the Bank of Canada’s core index recording a 1.8% annual increase for August from 2.1% in July and below the 2.0% target rate. Given this weaker than expected data, there is the potential for the bank to maintain commentary that inflation risks are still tilted to the downside.
Commentary on financial stability will be very important with the bank still very uneasy over risks associated with rising household debt and increased borrowing associated with rising house prices. According to the bank’s previous statement, there has been some evidence that house prices are starting to moderate in the Vancouver area and the latest house-price data confirmed that the annual rate slowed to 5.4% for August. There will, however, be further fears surrounding the Toronto outlook.
Overall, the bank is likely to remain concerned surrounding household imbalances and financial vulnerability, but the Finance Minister’s decision to tighten mortgage rules will be welcomed and could give the bank more scope to loosen policy in the future if necessary.
Growth conditions will be another important aspect with a particular focus on exports. The August trade data was better than expected with the deficit at the lowest level for six months as exports to countries outside the US recovered strongly. There has also been some tentative evidence that capital spending levels in the energy sector are stabilising and crude shipments have recovered from the wildfires.
Other data releases have been mixed with a stronger than expected reading for housing starts and a rebound in the September PMI index, while the September employment report was also stronger than expected with an increase in jobs of over 67,000 for the month.
The bank will be uneasy surrounding investment levels and could push back estimates of when full capacity is likely to be reached. Overall, however, there is scope for the bank to be slightly more confident than expected in the growth outlook given the recent run of data.