The Bank of Canada will be holding its monetary policy meeting later today. The central bank is widely expected to keep interest rates unchanged at today’s meeting
The BOC’s interest rates currently stand at 1.75%.
Investors expect the central bank to remain on the sidelines with forward guidance unlikely to show any shifts to its view on interest rates. Thus, there is a good chance that the policymakers at the BoC will maintain the view that there is no rush to hike rates further.
The OIS markets’ probability for a rate hike has fallen below 20%, suggesting that there is only a very small chance that the BoC could surprise the markets with a rate hike.
The recent mix of economic data from Canada will see a guarded response from policymakers. BoC Governor Poloz will be hosting a press conference later in the day. Officials will also be releasing the updated Monetary Policy Report this week. Investors will focus on how far the views of the central bank have changed since the start of the year.
Inflation outlook was cut from 2.0% on a year over year basis to just 1.7% in the January monetary policy report. However, further cuts to the inflation outlook remain unlikely at the moment.
How Has the Canadian Economy Performed Recently?
The overall outlook for the economy has been lackluster.
Amid a host of declines, the labor market is the only silver lining for the economy. The recent struggles in the energy sector and weakness in the housing markets have dented the sentiment.
As a result, despite a robust labor market, the prospects remain bleak. To add to this, the global uncertainty continues to remain a major headwind for Canada’s economy for the moment.
Canada’s unemployment rate held steady at 5.8% for the past two months after slipping to 5.6% in the prior two months. Meanwhile, consumer prices grew 1.9% on a year over year basis in March.
This was a slight increase from the 1.5% inflation growth in February. Energy prices were stabilizing as they fell 1.2% in March. This was a moderate decline when comparing to the 5.7% fall in energy prices in February.
Building permits fell for the second consecutive month and gave up the gains made from the previous months. In February, Canada’s building permits fell 5.7% on the month. This was on top of a 6.0% decline from January.
Canada’s GDP growth has been weak since the fourth quarter of last year and continues to do so at least into the first quarter of this year.
Canada’s Business Outlook Survey, Q1 Recap
The Bank of Canada’s first quarter business outlook survey gave a dovish confirmation of the soft growth patch. The results of the business survey were consistent with the view that the central bank will keep interest rates on hold.
The BoC shifted to an aggressive rate hike cycle last year, but interest rates did not change in the past five months. While the first quarter survey has kept the hawkish sentiment in check, the Q2 survey will be coming out later towards the month of May.
The Q2 survey could potentially indicate a rebound from the soft economic patch. Businesses surveyed in the Q1 report noted that they expect sales to grow in the coming quarters. This could potentially be realized in the second quarter survey results.
BoC Rate Hikes to Remain Data Dependent
Therefore, it is likely that the BoC will simply bide time as it assesses further incoming data. The overall language in the BoC’s forward guidance is also likely to remain the same as its previous statements.
This means that the BoC will maintain interest rates at the current level at least until the June monetary policy meeting.
Given the fact that the Federal Reserve has ruled out further rate hikes for the rest of the year, the Bank of Canada is also likely to maintain this tone. There is a risk that the BoC’s forward guidance could turn more dovish than previous meetings.