Sounds like something from a NME album review, but no. All about the Bank of Canada, innit?
(ICYMI: Bank of Canada holds rates at 0.50%, as expected but offers nod to better economy)
Barclays on the Bank of Canada decision
- The BoC highlighted the recent encouraging data and did not mull on the risks to financial stability that had gathered some attention in the past few weeks. The strong growth in Q1 is likely to moderate, but the adjustment to lower oil prices is largely complete. Inflation dynamics are as it expected, with low core inflation and wage growth signalling ongoing excess capacity. The bank reiterated its concern regarding the competitive issues that Canadian exports have been facing, and reiterated the risks to the outlook outlined in the April MPR. Despite the upbeat tone, the neutral stance remains and we expect the BoC to stay on hold in 2017.
- The BoC kept its neutral stance but with a more upbeat tone. Bank of Canada held its overnight rate target at 0.5% but instilled a slightly more optimistic tone to the statement. The BoC dismissed recent weakness in headline inflation as it has been driven by lower food prices, although it reiterated weakness in core inflation and wage growth. In contrast with the April statement, the bank judges recent data as encouraging, and dropped its warning that some of the data rebound was temporary. However, it acknowledged the pace of activity is expected to moderate in Q2. Therefore, the current policy stance remains appropriate. Contrary to our expectations, there was no extensive discussion of financial stability issues, and the statement is less defensive than what we had expected.
- Encouraging data overshadow housing risks. Data improved in Q1 17, supported by the rebound in oil prices and the effects of the Child Care benefit. In April, the BoC had a cautious tone on the data, as some of the rebound was due to transitory factors. However, in May the BoC decided to highlight the "recent encouraging data, including indicators of business investment" and its broader scope across regions, although it warned that activity will moderate its pace in Q2. The recent issues with Home Capital Group and Moody's downgrade of Canadian banks were overlooked, and the BoC instead decided to highlight the effects of macroprudential policy in contributing to more sustainable debt profiles, without having so far cooled significantly the housing markets.
- Despite the upbeat tone, the neutral stance remains and we expect the BoC to stay on hold in 2017. Although the worst of the adjustment to low oil prices is behind us, significant slack remains in the economy, and wage growth and core inflation remain subdued. The robust consumption spending could be at risk if wage growth remains at historically low levels, as real income erodes. Furthermore, investment decisions could be delayed or downsized due to uncertainty over US economic and trade policies. We reiterate our view that the BoC will remain on hold for the rest of the year and continue to expect USDCAD to reach 1.40 by year-end.
(bolding mine)
