Not much has changed since the Bank of Canada released its April Monetary Policy Report, the central bank announced May 27, and as such the overnight rate target is being held at 0.75%.
The overall outlook for the Canadian economy remains steady, with a strengthening of the American economy expected to reach “solid growth” in Q2, in spite of a weak first quarter south of the border. This will drive Canadian exports and investment, said the central bank. As well, lower oil prices will continue to bolster consumption in Canada.
Oil prices have increased in recent weeks, however, which has boosted the Canadian dollar. If this keeps up, the bank said, “their net effect will need to be assessed as more data become available in the months ahead.”
BMO’s Douglas Porter said the fact the Bank raises this possibility of reassessment is the most important comment in the statement.
“Many will read this as somewhat dovish, because it’s framed by a discussion on the Canadian dollar, and the knee-jerk reaction will be that they are less than thrilled about the firming in the Canadian dollar from the March lows,” he said in a note to investors.
Porter points out, however, that the drop in the price of oil was what drove January’s rate cut from 1%, where it had sat for more than four years. Now oil prices have recovered by 30% from the lows seen in March and the cost of West Texas Intermediate is sitting around $58, while the Bank of Canada’s projections are based on an average price of $55.
Inflation remains on the same path as seen last month, the Bank said in its news release, estimating the “underlying trend” to be 1.6-1.8%.
“Core inflation remains above 2%, boosted by the pass-through effects of past depreciation of the Canadian dollar, as well as certain sector-specific factors,” the statement said.
“Although a number of complex adjustments are under way, the Bank’s assessment of risks to the inflation profile has not materially changed.”
Porter said the mention of these “complex adjustments” suggests some underlying uncertainty, however.
“They now have at least some doubts over just how tame core inflation actually is at this point,” Porter said.
Household debt hasn’t changed materially, with the Bank saying risks related to financial stability remain elevated but are “evolving as expected.”
Overall, the news in the release is that there isn’t much news.
“After the extreme drama early this year, Bank of Canada policy has settled back in to a mundane routine,” Porter said.
He said this will likely not change unless there is a substantial change in the price of oil, to the tune of $15-$20 per barrel in either direction, or the U.S. economic outlook changes materially.
“While we believe the Bank is on hold for an extended period – and the Bank likely believes it is on hold – we have a real-world example of how Mr. Poloz is ready and willing to act abruptly if conditions change significantly,” Porter said.
“And the overriding message from today’s statement is that the Bank is keenly awaiting any new news from the incoming data.”
Paul Ferley, assistant chief economist at RBC Economics, said it is expected that the rate remain at 0.75% through the remainder of 2015, but that this will change by the end of 2016.
“Our forecast assumes that sufficient evidence of above-potential growth being sustained will be evident by the second quarter of 2016, thus returning the central bank to tightening mode,” Ferley said.
“With core inflation expected to trend closer to the Bank of Canada’s mid-range target of 2% during the forecast horizon, we expect the pace of tightening to be gradual with the overnight rate finishing 2016 at a still stimulative 1.75%.”
Prior to the release, the Canadian dollar was sitting around 80.43 cents U.S. As of press time, it has fallen to 80.09 cents U.S., which could be in response, in part, to the release of American data related to jobless claims.
