The Bank of Canada raised its key policy rate as expected to 1.50%. Monetary policy remains highly data-dependent given economic growth continues to run above the Bank’s projections. Andrew Kelvin, Senior Rates Strategist, TD Securities, talks to Sara D’Elia about how higher rates might impact the loonie and how many hikes from the BoC are expected going forward. Click here for Andrew’s previous Bank of Canada interview.
The Bank of Canada hiked rates by 25 basis points today and here to talk about what stood out in the statement is Andrew Kelvin from TD Securities. Thanks for being here.
Thank you for having me.
No surprise that the Bank of Canada hiked today but talk to us a little bit about what was notable in the statement.
There were a few subtle changes to the way they described the economy. They were encouraged by some of the recent housing data. They thought suggested that the market was starting to stabilize after the B20 regulations that came in in January. They are seeing the rotation from consumption growth to business investment, which has been something that Bank of Canada's been looking for quite some time. And that should be construed as something they see as, I think, very optimistic as well. So largely as expected, they will continue to move gradually. The next move in rates will be higher in their view. But nothing too surprising I suppose.
You mentioned the gradual pace of rate hikes. They also mentioned though a real focus on data and, specifically, inflation received a lot of attention today. It's near a seven year high. We're above target right now. Do you think that matters and what are you watching on the data front?
Well, we're still close to the bank's target range that they wouldn't be too concerned by headline inflation levels, and they look at the core of inflation measures that tries to strip out some of the volatility. So the core inflation measures are actually running it at 1.9%, so effectively at target. And they've also said that as long as inflation is expected to come back to their target level at the end of their forecast horizon, they're happy to look through these transitory shocks due to things like minimum wage hikes or higher oil prices.
The last time I had you on the show, you talked a little bit about the loonie ends-- said you thought it was about fair value. Today, after the raid announcement, we were up about a fifth of a percent. What's your outlook going forward?
Well, in the very short term, we think the next move in the loonie will be lower. We think we get down to about $0.74 loonie, just because the upward momentum from oil prices probably has mostly faltered at this point. And the next move in central banks is going to be from the Federal Reserve, rate differentials going forward should support the Canadian dollar depreciation versus US dollar. Taking a longer term view? $0.74, $0.75 seems about right.
And I'm going to close off by asking you about your outlook going forward and quote you again. You highlighted that you're thinking about two rate hikes per year going forward. Is that still true, does that hold?
That's still true. The bank has opened the door to, perhaps, maybe a little bit quicker pace of tightening just because they are data dependent. If the data does reach or surpass their projection heading into October, it certainly would be in play. But we think the most likely course would be for them to continue at two hikes per year.
Thanks very much.