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BoC Recap: Central Bank keeps rates steady and turns cautious on the outlook

Dec 12 2018, 08:25 PM (+06) | Orbex.com

The Bank of Canada's rapid pace of rate hikes stalled as the Central Bank kept the interest rates steady at 1.75% at its meeting last week on Wednesday. This was widely expected but the Central Bank surprised with its cautious turn in the policy outlook.

The Canadian Central Bank signaled that the pace of future rate hikes would be more gradual, and the dovish statement sent the Canadian dollar to close weaker on the day.

This came as the markets interpreted the statement as a possible delay for another rate hike in January. The Bank of Canada has been one of the few central banks that has been tightening its monetary policy. The Central Bank hiked interest rates five times so far since July 2017.

This came amid the economy showing strong signs of expansion and spare capacity was being absorbed.

However, the BoC noted that further rate hikes were needed to contain inflation near its 2.0% inflation target rate. However, the Central Bank acknowledged the recent downside revision to growth figures indicating that there could be additional room for inflation to grow.

As a result, the BoC said that this was a sign that the Canadian economy might not be as close to full capacity as previously noted.

"Governing Council continues to judge that the policy interest rate will need to rise into a neutral range to achieve the inflation target," the Bank of Canada said its statement.

The probability for an interest rate hike in January declined after the dovish statement from the Central Bank. Investors were previously pricing in a rate hike in January. However, adding to concerns is the lower crude oil prices alongside a decline in economic growth. As a result, the probability of a January rate hike fell from 60% to 36% last week, according to the overnight index rates market.

Despite the current hold on interest rates, the overall bias is for the BoC to continue with its rate hike.

The Central Bank previously noted that its neutral rate of interest was at 2.5% - 3.5% band. This meant that there was further room to grow for the interest rate to reach the neutral level.

Inflation is expected to fall in the coming months according to the BoC. The Central Bank said that it would assess the incoming data and look to global trends. The risks that the Central Bank signaled included the household consumption, housing markets, oil prices, and the global trade developments.

Following the BoC's statement, governor Poloz gave a speech outlining the Central Bank’s policy outlook.

Poloz said that although the economy advanced 2.0% in the third quarter beating the BoC's expectations of 1.8%, current data indicated potential weakness in the economy going forward.

The Bank of Canada will be holding its next monetary policy meeting on January 9th. However, following the cautious tone and the recent decline in the economy, the BoC is now likely to hold interest rates at the next meeting as well.

The Canadian dollar was seen rising to a fresh one year high, led by weakness in oil prices and the dovish turn from the Central Bank.

Later in the week, on Friday, Canada’s monthly jobs report was released. Data showed that the unemployment rate fell to 5.6% in November. This was better than forecasts which called for an unchanged print of 5.8% and marked the lowest level on record.

The economy was seen adding 94,100 jobs during the month which also beat estimates. Overall, the payrolls report continued to show improvement in the Canadian labor market which could potentially signal that the decline in the GDP was only temporary.

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