CAD Falls As BOC Highlights Rate Hike Headwinds

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As widely expected, the Bank of Canada kept its headline cash rate unchanged at this month’s meeting with an accompanying statement that somewhat dampened bulls’ expectations. The BOC noted that its decision is “consistent with an economy operating with little slack”. Regarding inflation, the bank said that it sees total inflation hitting 2.3% this year, an upward revision of 0.3% from the prior estimate. However, the bank also forecasts inflation falling back to 2.1% in 2019.

Concerning wage growth, the BOC said that while wages have been growing, they still remain below the levels that are indicative of a market with no slack. The bank did add however, that with above potential GDP projected for the next three years, higher rates will be necessary although the bank was keen to clarify that “some monetary policy accommodation will still be needed to keep inflation on target”.

Key Takeaways from the Monetary Policy Report (MPR)

Canadian GDPO growth forecasts were downgraded to 2% over 2018 from 2.2% prior due to the weaker than expected start to the year. The BOC now forecasts Q1 GDP growth of just 1.3% which represents a roughly 50% reduction from the prior estimate. However, the bank has raised its 2019 forecast to 2.1% from 1.6% prior. As the BOC highlights rate hike headwinds, regarding the 2018 downgrade, the bank said this was due to weaker contributions from consumption, housing and trade which are now expected to be a drag on growth.

Potential GDP growth for 2018 has been raised to 1.5% – 2.1% and to 1.4% – 2.2% for 2019, making both new estimates roughly 0.4% higher than the previous estimates. The BOC said that this “suggests the Canadian economy has made some progress in building capacity”. However, the nominal neutral rate has been left unchanged at 2.5% – 3.5%.

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GDP Expected To Rise After Q1 Weakness

Adding detail around these GDP forecasts the BOC said that it expected GDP growth to rebound after Q1 as “some of the weakness in housing and exports is expected to be unwound”. However, the bank does note that there are issues remaining as “exports and investment are being held back by ongoing competitiveness challenges and uncertainty about trade policies”.

Outside of domestic forecasts, the MPR noted that world growth is forecast to rise to 3.8% this year with the upward revisions to forecasts for the US, Europe, Japan, China and oil importing emerging market countries. For the US specifically, the BOC sees the economy growing by 2.7% in 2018 and 2019 “boosted by new government spending plans”.

Notes from The Press Conference

The BOC governor was questioned over whether rates would be raising but regarding how much they would be raised and at what pace. Poloz said that while the economy is operating near full potential and inflation is close to target, headwinds still remain such as NAFTA uncertainties, export bottlenecks and housing risks. This means that if monetary policy does not remain accommodative, the economy would not be growing at potential. Given that these headwinds are expected to diminish at a different pace it is therefore difficult to precisely gauge the likely need to tighten monetary policy. As such, the bank reiterated its intention to remain data dependant and respond accordingly.

Technical Perspective

BOC Highlights Rate Hike Headwinds

For now price is still moving within the broad bullish channel which has framed price over the last year and a half. Price is sitting in the lower end of the channel now and just above rising channel support. Ahead of this level now there is another key zone to watch around the 1.2450s level which is the completion of a corrective ABCD symmetry pattern and the 78.6% retracement from 2018 lows.

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