No change in rates but what’s important in the Bank of Canada statement? It’s the tone; the cautious outlook was maintained but three main issues were highlighted. Brittany Baumann, Macro Strategist, TD Securities, talks to Sara D’Elia about what the announcement could mean for future policy rate changes.
So that was one of the most important things we were looking at this meeting, is when does the output gap close? So at the prior two meetings, the bank was looking for the output gap to close by mid 2018. At this meeting, they pulled forward that timing to the first half of next year.
So that was in line with our expectations, but it did reflect a much stronger upward revision to this year's growth. Given that the output gap closed only in the first half of next year, that reflected a downward revision to next year's growth. That effectively means that much of the recent strength they've seen in growth they view as transitory and actually fading over a more medium term horizon.
The second issue they draw attention to is around jobs. And in spite of the strong report we had last month, it doesn't sound like that's going to be enough.
That's another thing that they flagged in the statement itself, is that it's too early to conclude that the economy is on a sustainable growth track. Part of that is, something we are all so cautious about, that the composition of growth, they are still not comfortable with. That much of the recent strength has been due to consumer spending and residential investment, which they now expect that to cool over the forecast horizon. Whereas the weaker areas of growth, being exports and business and investment, might be slower to emerge.
And the third point is nothing new. It's around uncertainty, specifically around trade and tax. Do you expect that to continue for the long term?
So that is another key risk that they continued to highlight at this meeting, was the uncertainty-- the considerable uncertainty-- over US fiscal policy and trade policy. And at this stage, that uncertainty remains undiminished given that no details have yet to be provided and that some of the implications are still viewed as negative in terms of Canadian growth.
Now, when you look at the revised outlook from the Bank of Canada, how does this play into when you think we could start to see them hike rates?
Well, at this meeting we learned that the bank now sees the output gap closing slightly earlier, by the first half of 2018. So that tells us that the next rate hike could come as early as the middle of next year. And that is slightly earlier than we currently expect.
Now, that being said, this year it appears that the downside risks to the outlook that the bank has previously flagged are still there, and this being uncertainty over fiscal policy, as well as the sustainability of growth going forward. So if anything, we still believe that the bank will remain very much on hold, at least this year.
Thank you very much.