BoC goes back-to-back – Nomura

The BoC followed up on its July interest rate hike by raising the target for the overnight rate a further 25bp to 1% at its September meeting, notes the research team at Nomura.

Key Quotes

“This was in line with our view, but was a surprise to the consensus of market economists. The BoC’s back-to-back 25bp rate rises means the Bank has now taken back the 2015 oil price shock “insurance” cuts. As it did in July, the BoC reiterated that further policy adjustments will continue to be “guided by incoming data” and that the policy path is not pre-determined, with close attention to be paid to labour market developments and how indebted households react to higher interest rates. Although there were some cautious comments, the tone of the accompanying statement, particularly on domestic and global growth, was upbeat. And while the CAD’s appreciation was mentioned, there was a lack of any discernible push back on recent strength. In our opinion, this illustrates that further policy tightening is firmly on the table. Based on positive momentum in the Canadian economy, we have pencilled in another 25bp BoC rate hike by its December meeting, with further modest tightening likely to come through over 2018.”

“CAD strategy

The September rate hike has caught the market a bit off-guard, but helps reaffirm our positive outlook for the CAD. With Canada’s robust economic performance becoming self-reinforcing, we think the market will continue to price in prospects of higher BoC interest rates, and as a result relative yield spreads should continue to move in favour of Canada, supporting the CAD. And when combined with our bearish USD outlook, a move below 1.20 in USD/CAD in the not too distant future looks likely.”