BoC hikes rates with a somewhat cautious statement - Wells Fargo

According to analysts from Wells Fargo, the Bank of Canada had at least some element of surprise in announcing today’s rate hike to 1%, although the tone of the written statement was somewhat cautious.

Key Quotes: 

“The Bank of Canada (BoC) raised rates this morning in a move that was somewhat anticipated by financial markets, but generally not expected by most economists. Admittedly, we thought October would be the first reasonable opportunity for the Bank of Canada to raise rates. That said, in our note following last week’s better-than-expected report on second quarter GDP, we said “we would be remiss not to acknowledge there is some risk policy-makers could act at their scheduled meeting this coming Wednesday.”

“The announcement came with a significant re-write of previously published press releases in which BoC policy makers recognized that economic data have been “stronger than expected”. Actions speak louder than words, and today’s rate hike demonstrates the fact that the BoC judges the faster rate of growth to be “more broadly based and self-sustaining.” Having said that, there was a fair degree of caution in the rest of the published statement  that, in our view, hedges those comments about growth being “selfsustaining.”

“It bears noting that the rate hike today was couched as a “removal of some of the considerable monetary policy stimulus,” and that future decisions are not predetermined. The statement also spoke of some remaining slack in labor markets and subdued wage pressure on inflation. The headline rate of CPI inflation in Canada is just 1.2 percent at present, near the low end of the target range. The last line of the official statement spoke to elevated household debt levels and the need for monitoring how higher rates impact the Canadian consumer. We will be watching that as well.”

“The move by the BoC today likely takes another hike in October off the table. December 6 is now a “live” meeting, though our baseline expectation is that a slowing growth profile will justify the BoC remaining on hold, conditional on the outlook for inflation.”