BoC: Rate cut risk receding – ING

James Knightley, Senior Economist at ING, suggests that a rebound in activity data suggests the prospect of another rate cut has receded, but the BoC continue to warn that currency strength could still be an issue.

Key Quotes

“The Bank of Canada has held rates at 0.50% since July 2015 with the overnight rate likely to remain there after today’s policy meeting. Expectations had been building in recent month’s about the possibility of a rate cut but the statement accompanying last month’s meeting suggested that the likelihood of such action is receding.

It looks as though activity in 1Q16 was very strong with annualised GDP growth possibly hitting 3% (release due on May 31st). Admittedly the BoC is putting this down to temporary factors – exports look to have bounced while investment spending will remain deep in contraction territory – but there is job creation and rising household demand. Last month’s statement went on to say “it does appear that the positive forces at work in the economy are starting to outweigh those that are negative”.

The Bank has also been emphasizing the boost from changes to fiscal policy under the new government with the statement suggesting that the March budget measures “will have a notable positive impact on GDP”. Consequently, the government (like private sector economists) have been revising up growth forecasts which mean that “the output gap could close somewhat earlier than the Bank had anticipated in January”.

The BoC have also been sounding relatively relaxed on the recent movements of the Canadian dollar. With core inflation already close to target, we are therefore going to need to see some fairly significant data disappointments to get any more rate cuts. Consequently, it is looking increasingly likely that the next move in rates is up rather than down.”