CAD: Policy turning point - Nomura

On expected lines, the Bank of Canada (BoC) raised its policy rate by 25bp to 0.75% at the July meeting as it stressed that future rate hikes will remain data dependent, and policy is not on a pre-determined path, notes the research team at Nomura.

Key Quotes

“Based on positive momentum in the labour market and economy, we continue to look for another rate hike by December. This monetary policy impulse should continue to support the CAD, particularly against currencies linked to central banks showing no urgency to shift its bias, such as the AUD.”

“Taking back some insurance

The BoC raised the target for the overnight rate by 25bp to 0.75% at its July 2017 meeting. This was in line with our base case and wider market expectations. Indeed, following the run of positive data and hawkish rhetoric from BoC officials over recent weeks, interest rate markets had assigned over a 90% chance of a 25bp rate hike in July. This is the first rate hike by the BoC since September 2010 and takes back half of the emergency stimulus put in place in 2015 to offset the oil price shock.”  

“According to the BoC, recent data have “bolstered” its confidence in its outlook for above-potential growth and the “absorption of excess capacity in the economy”. The domestic growth story is “broadening” and in the eyes of the BoC is “becoming more sustainable”. And although current inflation is soft, temporary factors are at work, and as highlighted by Governor Poloz, central banks must target “future inflation” as monetary policy operates with a lag. Moreover, financial stability risks remain front of mind, as higher rates will help “mitigate” system vulnerabilities.”

“From here, “further adjustments” in rates will remain guided by incoming data, with Governor Poloz stressing that policy “isn’t on a predetermined path”. However, Governor Poloz did point out that he does not “doubt that interest rates will move higher” over time. With the highly indebted Canadian household sector more sensitive to interest rates, the impact of the rate hike will be gauged by the Bank. As such, we remain of the view that the cautious BoC will remain on hold until December 2017 before it acts again, and that the cycle will be far more elongated and shallower than past experiences.”