BoC: Largely unchanged outlook, but vigilant of downside risks - Nomura

According to the research team at Nomura, the Bank of Canada (BoC) kept its policy rate unchanged at 0.5% on expected lines, reiterating that “the current stance of monetary policy remains appropriate”, suggesting a neutral and largely unchanged policy stance.

Key Quotes

“However, the Governing Council reaffirmed its cautious stance on its projection, mentioning that it “will continue to assess the impact of ongoing developments, mindful of the significant uncertainties weighing on the outlook”, which is likely a reference to the risks stemming from a potential change in US trade and/or tax policies under soon to be President Trump.”

“In line with our expectations, the Bank revised upwards its growth expectations for 2017 to 2.1%, which implies a closing of the output gap around mid-2018. However, export growth was revised slightly weaker, incorporating a broadly stronger CAD, which is seen “exacerbating ongoing competitiveness challenges”. On the domestic front, the Bank expects consumption “to remain solid”, while at the same time recognising that residential investment will likely struggle as housing finance rules are implemented and mortgages rates rise in response to higher bond yields. On the flip side, fiscal policy is “expected to support growth in 2017” more than previously expected.”

“On the inflation front, the Bank continues to acknowledge that lower food prices are the main drivers of lower headline inflation since October. Negative pressures stemming from excess capacity in the economy is expected to prevent inflation from overshooting the BoC’s 2% target in the months ahead as consumer energy prices rise and the impact of lower food prices dissipate.”

“Overall, decision and updated outlook does not change our view and we continue to expect the BoC to be on hold for most of 2017. However, there is substantial uncertainty on this outlook, mainly caused by the lack of details on trade and tax policy once Donald Trump becomes US President.” 

“We expect USDCAD to continue to trade heavy, as oil prices are likely to continue to increase slightly, barring a continued widening in the rates differential.”