Stephen Poloz’s debut: What the analysts say

The Bank of Canada pledged on Wednesday in new governor Stephen Poloz’s debut to keep its benchmark interest rate on hold as long as there is economic slack, weak inflation and households are managing debt carefully, but it also made it clear its next rate move will likely be a hike. Here’s what the analysts say:

Douglas Porter, chief economist BMO Capital Markets

 “Poloz brings a slightly different style to the Bank, but so far no real change in the substance of their view. While the tone of today’s official remarks was a bit more dovish than in May, that likely would have been the case under the prior governor, given that core inflation remains stuck near 1% and growth is struggling to get much above that zone. We continue to believe that the next move in rates by the Bank is at least a year away — we have pencilled in 2014 Q3 for a restart date for tightening, and recognize that the risks are pretty one-sided that it could well be later, but unlikely to be earlier. The Bank’s three conditions — degree of slack, core inflation, and household debt — will provide the guideposts on any changes in timing.”

Avery Shenfeld, CIBC WM Economics

“A change at the top didn’t really mean a change in view, with the Bank of Canada’s latest statement showing no substantive change in view. As expected, interest rates were left on hold. The Bank didn’t materially alter its economic outlook, raising 2013 to 1.8% (from 1.5%) on the back of the better start to the year in Q1, and only knocking 2014 back by a tick to what is still a high-end-of-consensus call for 2.7% growth. The result is that the output gap still closes in mid-2015 (no change) and inflation reaches 2% on the same timing. Since that’s key to the interest rate outlook, the timing of a tightening also likely has not changed in the Bank’s eyes, although they have changed the wording in their statement to better define the conditions under which policy will turn. Rather than merely say that rates will be on hold for “a period”, they tie that period to economic conditions (slack, muted inflation, and the lack of any worsening in household debt problems), with tightening coming when inflation and slack are normalized. The Bank’s Q2 forecast looks on the weak side and potentially easy to beat, but they have a higher figure for Q3 to balance it. Inflation follows a slower track back to 2% in the new forecast, but still gets there in Q2 2015. Overall, this really was neither more or less dovish than before, but the market had previously moved to price in small risks of earlier rate hikes that today’s clearer language downplays.”

Jimmy Jean, economic strategist, Desjardins Capital Markets

“Dovish, on balance. The Bank is more concerned with evidence of job market slack and its implication for the inflation outlook, than the effect of higher mortgage rates, which it sees as eventually helping re-normalize the housing market. The forward guidance is maintained for prudential purposes but clearly, with a domestic economy seen relatively weak and challenged by Québec and Alberta distortions in the near term, there is nothing that indicates any motivation to strike a more hawkish tone anytime soon. We remain comfortable with our late-2014 assessment for the next hike.”

Derek Holt, Vice President, Scotiabank Economics

 “The bottom line is that the BoC ultimately went more dovish on the details to the statement as expected by revising global growth lower and making it clearer that a prolonged rate pause that roughly matches the Fed’s lies in order.”


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