BoC: Few positives from the removal of downside risks – Nomura

Research Team at Nomura, notes that as widely expected, the Bank of Canada (BoC) kept its policy rate unchanged at 0.5% yesterday.

Key Quotes

“However, the big surprised was the removal of the mention “risks to the profile for inflation have tilted somewhat to the downside”, being replaced with a more neutral assessment that “risks around its updated inflation outlook to be roughly balanced.” The Bank continued to assess that “overall, [the] balance of risks [are] still in the zone for which the current stance of monetary policy is appropriate.”

The BoC revised downwards its GDP growth forecasts, expecting the economy to grow by 1.1% in 2016 and 2.0% in both 2017 and 2018, implying that the economy returns to full capacity around mid-2018 (this is materially later than what the BoC had expected in the July MPR (around end-2017)). This revision to growth is primarily owing to “slower near-term housing resale activity and a lower trajectory for exports.” The Bank believes the government’s measures to stabilise Canada’s housing market are likely to reduce household vulnerabilities, but at the same time constrain residential investment, placing further downward pressures on growth. Despite downward revisions to its growth forecast, the BoC still expects Canada’s economy to grow at a rate above potential starting in H2 2016, supported by accommodative monetary and financial conditions and fiscal measures.

Overall, while the BoC removed the reference to downside risk to inflation, we believe this is mainly the result of downward revisions to growth and inflation and, hence, should not be viewed positively. Moreover, the cautious tone conveyed in the statement does not change our fundamental view and we continue to expect the BoC to remain on hold for the rest of the year. In our view, the statement remains relatively dovish, especially because of the mention in the Press Conference’s Opening Statement that “[the] Governing Council actively discussed the possibility of adding more monetary stimulus at this time, in order to speed up the return of the economy to full capacity.”

However, we believe that any necessary stimulus to support the economy is more likely to be delivered through fiscal policy rather than through further cuts to the policy rate. On this front, the coming Fiscal and Economic Update by the Department of Finance (likely in November) should be watched.

The outsized reaction of USD/CAD to the BoC’s decision is likely explained by higher oil prices, with USD/CAD declining some 0.7% since the announcement. Nevertheless, it also highlights somewhat that market expectations were possibly skewed towards a more dovish communiqué. Nevertheless, as we said previously, the BoC statement should viewed as dovish, not hawkish.”