BoC holds rates amid Trump policy uncertainty

The Bank of Canada (BoC) announced today that the overnight policy rate remained unchanged at 0.5%. There wasn’t much suspense heading into today’s monetary policy meeting as economic data had shown at least some improvement recently and a rate cut did not appear warranted.

At Invesco Fixed Income, we believe the statement and press conference is positive for equities and mostly neutral for fixed income as monetary policy remains accommodative and global growth has picked up. The Canadian dollar, we believe, remains overvalued versus the U.S. dollar.

Bank Governor Steven Poloz recognized exports, employment and business sentiment as positive factors in the last several months, but admitted that not much had changed from the October monetary policy meeting. He expressed concern that excess capacity in the economy remains, keeping overall gains in inflation constrained. Consumer Price Index (CPI) inflation continues to be well below the BoC target of 2.0%, largely due to declines in food prices and the lagged effect of falling oil prices.

Poloz acknowledged the recent increase in yields was a result of a strengthening in overall global growth, as well as expectations of an increase in U.S. fiscal policy after the U.S. election.

The Bank’s economic projections were updated in today’s Monetary Policy Report (MPR), but the projections showed only slight increases in both Canada and global growth expectations.

Most of the Governor’s comments in the press conference were focused on how much uncertainty was built into their forecasts due to the election of Donald Trump. Poloz mentioned changes in U.S. trade policy were possible, but he admitted that there was no way to model the change on Canadian growth prospects currently. The BoC did include an increase in U.S. fiscal spending in their MPR projections even though details of specific fiscal spending plans were not yet known.

The BoC specifically left the door open to the possibility of a future rate cut, but I do not believe a cut is likely unless changes to U.S. trade policies are implemented and those changes are expected to have a negative effect on the Canadian economy. In my opinion, U.S. policy uncertainty is likely to keep the BoC decision on future rate moves on hold for several quarters.