BoC: Little urgency – BMO CM

Last week’s events reinforced the theme that the Bank of Canada is likely to remain very patient before moving rates higher again, according to Benjamin Reitzes, Canadian Rates & Macro Strategist at BMO Capital Markets.

Key Quotes

“The data were mixed, with the housing market continuing to recover from Ontario’s spring policy changes as the OSFI mortgage rule changes loom over the outlook. It will probably take until the spring (at the earliest) before we have a good sense of the impact of the new stress tests. On the positive side of the ledger, manufacturing sales were surprisingly strong despite the CAMI auto plant strike. That bodes well for a rebound in September GDP after the contraction in August.”

“A solid handoff for Q4 would reinforce expectations that the Canadian economy remains in good shape, even if growth has slowed from the breakneck pace seen from 2016Q2 to 2017Q2. The final data point this week was CPI which was pretty benign. Headline inflation slowed as expected, while the average of the core measures held steady at 1.6%. Nothing here to itch the BoC’s trigger finger.”

“We also heard from BoC Senior Deputy Governor Wilkins who explained in great detail the Bank’s cautious stance. Uncertainties surrounding the impact of prior rate hikes on heavily indebted households, the interplay with the OSFI rule change, the potential for NAFTA to dissolve, and unknowns around spare capacity and the Phillips curve aren’t likely to be cleared up anytime soon. Indeed, we believe spring is the earliest we’ll get clarity on NAFTA and housing. There’s a chance the output gap/Phillips curve dynamic could pop up a bit sooner but it could also take well into 2018 or longer.”

“Side note… one important tidbit that may have been overlooked in Wilkins’ speech was that the BoC plans: “starting next year, to advance the timing of speeches providing economic updates to align them more closely with the fixed announcement dates between MPRs.” That should help alleviate any communications issues and lessen the surprise factor ahead of non-MPR meetings.”

“Key Takeaway: The Bank of Canada is in exactly no rush to hike rates for a third time, as speeches from Governor Poloz and Senior Deputy Governor Wilkins have stressed over the past two weeks. The many sources of uncertainty clouding the outlook aren’t likely to fade until the weather starts warming up, leaving March as the earliest timing for the next rate hike.”