BOC Left Policy Rate Unchanged. Appeared More Positive On Growth Outlook

The BOC kept its powder dry and left the overnight rate unchanged at 1% for the 32nd consecutive meeting. The tone in the policy statement remained neutral but sounded more positive over the exports and housing sectors. The global economic outlook was more balanced with the view that growth in the US was more than offsetting the negative impact of the situation in Ukraine on the recovery in Europe. On the monetary policy outlook, the central bank reiterated that ‘its timing and direction will depend on how new information influences the outlook and assessment of risks’.

While acknowledging that stronger growth in 2Q14 has brought GDP to almost the level projected in July, the BOC remained cautious and indicated the need to wait for a broadening in export growth to the rest of the economy. Regarding the growth in exports, policymakers judged that ‘this pickup will need to be sustained before it will translate into higher business investment and hiring’. Policymakers continued to see inflation as being anchored and the upside was partly driven by temporary factors. As mentioned in the statement, ‘recent data reinforce the Bank’s view that the earlier pickup in inflation was attributable to the temporary effects of higher energy prices, exchange rate pass-through, and other sector-specific factors rather than to any change in domestic economic fundamentals’. The BOC also highlighted the fact that inflation was close to its 2% target. On the housing market, the central bank noted that it ‘has been stronger than anticipated’ but continued to warn that ‘the risks associated with household imbalances have not diminished’. Note that the reference that household imbalances are evolving in a ‘constructive way’ was removed while the description of ‘soft landing’ in the housing market also disappeared.

Globally, the BOC was confident in the US outlook, citing ‘a solid recovery seems to be back on track with business investment now making a significant contribution to growth’. This probably was more than offsetting the drag on Eurozone’s recovery by the Ukraine crisis. The BOC admitted that the recovery in Europe has faltered as ‘the situation in Ukraine weighs on confidence’.

The BOC showed no urgency to change to monetary stance. As it stated, “its [rate hike or rate cut] timing and direction will depend on how new information influences the outlook and assessment of risks”. Besides, Canada’s economic data, we expect the BOC would pay close attention to Fed’s monetary decision. We expect BOC’s rate hike should lag the Fed so as to stimulate exports through a weaker loonie

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