4 Dec 2014
BoC tilts the inflation risks to the downside - Scotia Bank
FXStreet (Bali) - Following the BoC policy statement, the Global Economics Team at Scotia Bank, think that risk is geared toward the Central Bank revising its inflation outlook down even more than its prior forecast in October.
Key Quotes
"This is a confusing statement that spends much of the time applauding how the economy got to where it is now and factors that may be good for global growth, and then takes it back in what we think is greater conviction conveyed in the final paragraph to the effect that inflation risks are pointed somewhat lower going forward."
"Markets are weighting the first part of this argument by putting a bid to CAD and the front-end of the Canada curve is cheaper but the more patient trade over time probably has this interpretation misplaced in our view. Again, the key lies in how to interpret the last paragraph, and that risk is geared toward perhaps revising its inflation outlook down even more than its prior forecast in October."
"Note the use of the word ‘tempered’ in the final paragraph. This may sound like semantics, but a central bank chooses its words fairly carefully. The BoC says in the first sentence of that final paragraph that “….weaker oil prices pose an important downside risk to the inflation profile” and then goes on to say that this is only “…tempered by a stronger U.S. economy, Canadian dollar depreciation, and recent federal fiscal measures.” It does not say ‘offset’, or ‘overwhelmed’, but chooses tempered which could be taken as a synonym for, say, ‘only partially mitigated by…’."
"Thus, the statement errs on the side of expressing incrementally more concern about downside risks to the inflation outlook after netting out such factors. It is important to note that the BoC before this statement had already erred on the side of arguing that the factors driving inflation higher were temporary and would shake out with headline inflation falling back to about 1 ½% by mid-2015. It is only logical to assume that the collapse in oil prices would drive greater conviction at the BoC over this forecast which may be lowered yet."
"Overall I think the BoC statement spends much of its time erring on the side of being more encouraging about recent readings for the economy (growth, inflation, output gaps etc) but skewing the risks to growth and the inflation profile to the downside with a stronger warning on energy prices: "...the lower profile for oil and certain other commodity prices will weigh on the Canadian economy." This is to be continued into the January MPR when we'll really see their bias communicated more clearly through harder numbers and the BoC is likely just buying time here to evaluate the permanence of the drop in energy prices and the investment and other knock-on effect."
Key Quotes
"This is a confusing statement that spends much of the time applauding how the economy got to where it is now and factors that may be good for global growth, and then takes it back in what we think is greater conviction conveyed in the final paragraph to the effect that inflation risks are pointed somewhat lower going forward."
"Markets are weighting the first part of this argument by putting a bid to CAD and the front-end of the Canada curve is cheaper but the more patient trade over time probably has this interpretation misplaced in our view. Again, the key lies in how to interpret the last paragraph, and that risk is geared toward perhaps revising its inflation outlook down even more than its prior forecast in October."
"Note the use of the word ‘tempered’ in the final paragraph. This may sound like semantics, but a central bank chooses its words fairly carefully. The BoC says in the first sentence of that final paragraph that “….weaker oil prices pose an important downside risk to the inflation profile” and then goes on to say that this is only “…tempered by a stronger U.S. economy, Canadian dollar depreciation, and recent federal fiscal measures.” It does not say ‘offset’, or ‘overwhelmed’, but chooses tempered which could be taken as a synonym for, say, ‘only partially mitigated by…’."
"Thus, the statement errs on the side of expressing incrementally more concern about downside risks to the inflation outlook after netting out such factors. It is important to note that the BoC before this statement had already erred on the side of arguing that the factors driving inflation higher were temporary and would shake out with headline inflation falling back to about 1 ½% by mid-2015. It is only logical to assume that the collapse in oil prices would drive greater conviction at the BoC over this forecast which may be lowered yet."
"Overall I think the BoC statement spends much of its time erring on the side of being more encouraging about recent readings for the economy (growth, inflation, output gaps etc) but skewing the risks to growth and the inflation profile to the downside with a stronger warning on energy prices: "...the lower profile for oil and certain other commodity prices will weigh on the Canadian economy." This is to be continued into the January MPR when we'll really see their bias communicated more clearly through harder numbers and the BoC is likely just buying time here to evaluate the permanence of the drop in energy prices and the investment and other knock-on effect."