I continue to look for dovish signals from new Bank of Canada Governor Stephen Poloz but find only hawkish ones. The press conference was a dud so this key line from the statement is what we have to go on:
As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate.
Notice that it says and not or.
Lets look at the three points, any of them could tilt the BOC toward hiking:
- Inflation speaks for itself. It’s low and I don’t believe any type of inflation is on the horizon.
- Imbalances in the household sector refers to debt, mainly mortgage debt. The BOC wants to see a soft landing and flat home prices but Poloz hinted today that he’s worried about rising prices, something that might cause the BOC to tighten. On balance, that’s hawkish.
- Significant slack. The BOC forecasts that the output gap (another name for slack) will be closed by mid-2015. They were also talking about 3-4% private sector-driven growth in the US, which will spill over to Canada. So at what point between now and mid-2015 will the slack no longer be significant? Monetary policy works with about a 12 month lag so my bet is mid-2014.
At the moment the market hardly pricing in any chance of a BOC hike one year from now (about a 15% chance). I think the market is underpricing that risk. With the Fed taper talk and rising rates, Poloz had a reason to tilt more dovishly (like the ECB and BOE) but he didn’t. He remains confident in US growth and if/when that growth materializes the BOC will be hiking much sooner than the Fed.
