BOC Rate Hike A Sure Thing?
In line with recent comments from the Bank of Canada, which have taken a sharply hawkish shift, markets are widely expecting a rate hike tomorrow. With market pricing for a rate hike having surged above 92% (as shown by OIS) in recent weeks the key issue now will be what the bank signals going forward. The question is whether a hike at this meeting will represent the merely a normalisation of policy, following the rate cuts which started in 2015, or the start of a full hiking cycle.
BOC Courting Hawkish Expectations
Notably, the BOC had actively encouraged rate hike expectations head pf tomorrow’s meeting instead of trying to dampen them. Speaking to Handelsblatt last week the BOC governor echoed deputy governor Wilkins comments saying that “when you are driving towards a red stoplight, you ease up on the accelerator well before you get there”.
Furthermore, Poloz downplayed the fact that inflation remains subdued, forecasting it to move back into an uptrend in H1 2018 also adding that recent macro-prudential measures will help reduce housing market risks over time. The importance here is that the BOC is choosing to downplay risks to the economy and instead, highlight its preference for normalizing policy.
BOC Downplay Risks to the Outlook
The BOC cut rates twice in 2015 as Oil prices cratered over 2014/2015. Following the cuts, an 8% decline in the real effective exchange rate for CAD helped the economy rebalance. Residential investment and net exports were able to mostly mitigate the downside from weaker consumption and business investment. Risks to growth still remain, however it seems the BOC is now comfortable enough with the outlook to raise rates.
Data Printing Favourably
Recent data points have been highlighting strength in the Canadian economy, further emboldening CAD bulls. Indeed, the latest positioning data shows that CAD short positions have been rapidly paired as traders have reacted to comments and data. Friday’s Canadian jobs report was better than expected with the headline Unemployment rate falling back to 6.5% a level which, aside from April this year, was last seen in 2009.
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