BoC: Downside risks persist – Scotiabank

Derek Holt, VP & Head of Capital Markets Economics at Scotiabank, explains that neither them nor markets expect a rate change at the forthcoming BoC’s meet and the risk leans toward a clearer dovish bias.

Key Quotes

“Next Wednesday’s Bank of Canada announcements will include the statement that hits the wires at 10amET and a full forecast update contained within the April edition of the Monetary Policy Report followed by a press conference at about 11:15amET.”

“Neither we nor markets expect a rate change at this meeting. The risk leans toward a clearer dovish bias relative to the one-in-four market odds of a rate hike by year-end that is likely highly premature. Governor Poloz will come armed with plenty of fresh reasoning for a dovish bias and I wouldn’t be surprised to hear him repeat that cut risk remains on the table to counter downside risks.”

“A key argument why the BoC can diverge from the Federal Reserve on rate actions (and they’ve done so before under difference circumstances) is that Canada’s household cycle is far more mature than in the US and hence so is about two-thirds of the economy given the weight on consumption and housing in GDP. The home ownership rate is far higher in Canada and at cycle highs, the debt service burden is much more strained, the debt-to-income ratio is at a record high and so are house prices. Hiking at a mature point in the household sector risks rolling it over with little else to drive growth.”

“It seems almost trivial in this fuller cycle sense to emphasize the latest data wiggles— even as said data has been highly mixed. For instance, job growth has been strong, but wage growth is barely over 1% y/y and therefore real wages are falling while hours worked have been weak. Consumption growth is solid but likely temporarily boosted by factors like a large jump in child benefit payments, but investment imploded over 2016H2 and the weakness in exports has already been noted.”

“The latest Business Outlook Survey hinted at little evidence of capacity pressures, stable inflation expectations and strong investment intentions. Translating intentions into actual investment will take time and involves uncertainty, and while an investment recovery is a missing ingredient to more balanced growth, it would nevertheless potentially expand productivity capacity in disinflationary fashion. On both a fair and balanced reading of recent data and a longer cyclical perspective, the BoC can afford to be dovish next week.”