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.