Research Team at Nomura, suggests that the policy rates should remain unchanged, but BoC is likely to reiterate that risks are to the downside in its upcoming policy decision.
“The Bank of Canada (BoC) holds its next policy meeting on 19 October. At the last meeting in September the Bank left its policy rate unchanged at 0.50%, noting that the “risks to the profile for inflation have tilted somewhat to the downside since July” but added that “the Bank’s Governing Council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate”, We think this suggests the policy stance remains neutral and that the BoC is not considering further easing at this point.
We expect the BoC to leave its policy rate unchanged at this week’s meeting. We also believe that it will reiterate that risks on inflation remain tilted to the downside and that it will lower its growth forecast in its Monetary Policy Report.
While economic data have been strong in the past month, supporting the BoC’s forecast of a “substantial rebound in the second half of this year”, most of the strength is coming from a normalisation in activity following the disruptions caused by the wildfires in Alberta. However, there are still signs that underlying momentum remains weak. Notably, continued underperformance in non-energy exports suggests that the improvement in the trade balance is mainly driven by the normalisation in oil exports.
Moreover, the continued underperformance of retail sales over the past few months raises some concerns regarding the underlying strength of consumer spending, and we believe consumers have a higher propensity to save given the high level of household debt than the BoC and the Department of Finance assume. An important factor to consider is whether the impact of the recent tax credits on retail sales is delayed to August, and the data print on Friday will provide early signs with respect to this.
We continue to believe that the BoC will leave its policy rate at 0.50% for the rest of the year. We think there are two key questions to consider: 1) is the recent rebound in export performance sustainable, given continued underperformance is non-energy, and 2) what will be the impact of the fiscal stimulus? Until we get more concrete answers on these points, we expect the Bank to retain its wait-and-see approach. However, if further stimulus is judged necessary, we believe it is more likely to come from fiscal policy than from monetary policy.”