BoC strikes a cautious note

The Bank of Canada (BoC) left the target overnight rate at 1.25% at today’s meeting, after hiking the rate 0.25% at the January 17 meeting.

Global growth was described as “solid” and the recent changes in U.S. tax policy were expected to boost global growth in 2018 and 2019. The Canadian economy’s 3% growth rate in 2017 was characterized as being in line with the BoC’s projection. However, there was a recognition that growth in the fourth quarter was slower than expected due to higher imports and weaker exports. In addition, housing activity was deemed to have been pulled forward into 2017 due to new mortgage guidelines and government policies on housing.

While the BoC’s outlook for inflation (expected to reach its 2% target) and the economy operating near capacity appear to warrant higher interest rates over time, the monetary policy statement struck a cautious tone.

Recent U.S. trade policy developments are a concern and we think it should prevent any hasty monetary policy decisions. The BoC clearly needs more time to assess the combined impact of the mortgage policy changes, potential U.S. trade policy changes and the three rates hikes in the past eight months.

In light of the statement, we are fairly constructive on duration in Canada. The two additional overnight rate hikes priced in for 2018 now seem aggressive given the overleveraged Canadian consumer and the potential slow-down in the housing market. The Canadian dollar should remain weak until more detail emerges on U.S. trade policy.