Loonie Plunges After Bank Of Canada Keeps Rates Unchanged

After two rate hikes earlier in the year, once in July and an unexpected rate hike in September, the Bank of Canada decided to tread lightly, and kept its overnight rate at 1%, as everyone expected stating that "the current stance of monetary policy is appropriate" and changes its hiking tune, warning that "less monetary policy stimulus will likely be required over time."

Some more details from the statement:

Based on this outlook and the risks and uncertainties identified in today’s MPR, Governing Council judges that the current stance of monetary policy is appropriate. While less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate. In particular, the Bank will be guided by incoming data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.

The BOC also said that "inflation has picked up in recent months, as anticipated in the Bank’s July Monetary Policy Report (MPR), reflecting stronger economic activity and higher gasoline prices. Measures of core inflation have edged up, in line with a narrowing output gap and the diminishing effects of lower food prices. The Bank projects inflation will rise to 2 per cent in the second half of 2018. This is a little later than anticipated in July because of the recent strength in the Canadian dollar. The Bank is also mindful that global structural factors could be weighing on inflation in Canada and other advanced economies."

Looking ahead, the BOC expects growth to moderate in 2H 2017 and "remain close to potential over the next two years" while real GDP is expected to expand 3.1% in 2017, 2.1% in 2018 and 1.5% in 2019, from 2.8%, 2.0% and 1.6% respectively. Inflation expected to reach 2% by second half of 2018, later than expected in July because of "recent strength in the Canadian dollar." More:

Canada’s economic growth in the second quarter was stronger than expected, and was more broad-based across regions and sectors. Growth is expected to moderate to a more sustainable pace in the second half of 2017 and remain close to potential over the next two years, with real GDP expanding at 3.1 per cent in 2017, 2.1 per cent in 2018 and 1.5 per cent in 2019. Exports and business investment are both expected to continue to make a solid contribution to GDP growth. However, projected export growth is slightly slower than before, in part because of a stronger Canadian dollar than assumed in July. Housing and consumption are forecast to slow in light of policy changes affecting housing markets and higher interest rates. Because of high debt levels, household spending is likely more sensitive to interest rates than in the past.

The BOC also notes that exports and business investment are still expected to make a "solid contribution" to GDP growth

  • Contribution of consumption and residential investment to growth is expected to decline due to higher interest rates and policy measures affecting housing markets
  • Higher debt levels mean "household spending is likely more sensitive to interest rates than in the past"
  • Global growth to average 3.5% from 2017-19, though outlook is influenced by "substantial uncertainty" about geopolitical developments and fiscal and trade polices, including NAFTA

The immediate reaction was a plunge in the loonie, with the USDCAD surging over 100 pips from the pre-kneejerk move.

Full statement here.

Comments

asteroids Wed, 10/25/2017 - 10:13 Permalink

The BOC is now boxed in. Raise rates to keep up with the US and you sink the average Canadian. Don't raise rates and the Loonie get hammered.

Manipuflation Wed, 10/25/2017 - 10:53 Permalink

I keep forgetting that I have actual cash CAD on hand.  Oh well.  I guess I will just have to keep it for now.  I keep adding Canadian clad coinage to the notes as well just because the coinage turns up in circulation so often here.  Everyone wants to dump it on it everyone else.  That's fine.  I'll take it.    

Bankster Bug Wed, 10/25/2017 - 11:57 Permalink

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moonmac Wed, 10/25/2017 - 12:09 Permalink

We placed a $100K order for material not needed until 2Q next year at $1.21 thinking Canada’s price was dirt cheap. Now it’s $1.28 so we just lost $7K. We never time markets right.

Manipuflation Wed, 10/25/2017 - 14:10 Permalink

Yep.  Just checked.  That wiped my "profit" but I still have the physical cash so fuck off eh.  If you want to buy hard cash CAD Canuck from me then I will have to charge you extra.  If you are Jew then the rate doubles if you will buy from me.  Sorry, but that is the cost of doing business.  Shalom.  

chickadee Wed, 10/25/2017 - 20:14 Permalink

“With the economy near full capacity, any fiscal stimulus is likely to be inflationary — prompting an offsetting response from the Bank of Canada,” Josh Nye, an economist at Royal Bank of Canada, wrote

chickadee Wed, 10/25/2017 - 20:15 Permalink

Over the past year, Canada’s economy has been running at a pace rarely seen in the past couple of decades, rapidly eliminating spare capacity and prompting the central bank to raise interest rates twice since July. Economists are projecting 3.1 per cent growth in 2017, easily the best in the Group of Seven.

chickadee Wed, 10/25/2017 - 20:53 Permalink

If your listening for forward guidance from Bi-Poloz, you are wasting your time. The Bank of Canada is in a tightening cycle because they have no other direction they can go. They are doing the right thing having exhausted all other alternatives.