BoC: Death of the doves - Rabobank

The Bank of Canada raised the policy rate 25bp to 0.75% in line with market consensus and the accompanying Monetary Policy Report revised up GDP growth forecasts but revised down the outlook for inflation (despite announcing the first rate hike in over seven years), notes Christian Lawrence, Senior Market Strategist at Rabobank.

Key Quotes

“The main surprise was how hawkish the accompanying tone was. This was certainly not a dovish hike and the tone was arguably not aligned with underlying fundamentals.”

“The Bank suggested that low inflation is likely to prove temporary (despite lowering its inflation forecast) and that wage inflation has been picking up. We disagree with that call and expect both wage growth and core inflation to remain subdued over the next year.”

“To our mind, there seems to have been somewhat of a switch in stance from developed world central banks of late. Low rates aren’t driving demand inflation (regular readers will know that we argue they are actually hampering wage growth) but they are causing a build-up in imbalances and this is becoming an increasing concern for central bankers.”

“We now expect the Bank to raise rates again in October but the policy rate will likely remain stuck at 1% through 2018 as wage growth and inflationary pressures fail to materialise.”

“CAD now looks expensive compared to our CAD Market Model. We expect a period of trading the 1.28-1.30 range in the short term before returning to 1.30-1.32 in a few months.”