The Bank of Canada held rates steady in December but unexpectedly delivered a dovish decision statement. Fred Demers, Chief Canada Macro Strategist, TD Securities, talks to Sara D’Elia about what the recent rate announcement could mean for the loonie and what the outlook is for 2018.
The Bank of Canada left the overnight rate unchanged at 1% today. But my guest says the bank delivered a surprisingly dovish statement. Here to explain is Fred Demers from TD Securities. Thanks for being here.
Thank you for having me.
I want to start off with my first point. It was dovish. What made you feel that way when you heard what they said today?
I think the biggest point in their statement was repeating this notion that there is ongoing slack in the labor market. We strongly disagree with that. We think the labor market is very tight. We've seen a wage response this summer. Wages are not very strong, still below 3%. But they are moving faster. And to us it's a cause of concern, and we think the Bank of Canada should respond to that with a rate hike.
And there was a bit of a move in the loonie. We saw it tick lower today. What's your take or your outlook for it going forward?
Well, we were-- as a house, we are bearish on the US dollar, and that includes the Canadian dollar. We see higher oil prices, but yet the dollar, the currency, the loonie is not responding to that. But now, with the bank outlook a little bit more on the dovish side, it's going to be tough to maintain that tailwind on the loonie going forward.
They did say that they think higher interest rates will likely be required over time. When do you think we'll see the bank move?
Our call is still for January. But after today's decision, that's likely to change. I think it's up to Poloz, Governor Poloz, to make the decision. For us, the data validates a rate hike. Even today, from a data point of view, it could have been done. But if they keep up with that cautious approach, it could be as late as April.
And are you still calling for two hikes in 2018?
Definitely. This is where we have the highest conviction two hikes. I think it's going to be very difficult to deliver more than that, even though for the Federal Reserve in the US, getting two, three, or even four, that's something that the market is entertaining at this point.
Thank you very much.