Bank of Canada Senior Deputy Governor Carolyn Wilkins gave a dovish speech in New York City Wednesday evening. First, Wilkins mentioned that low inflation was one of many reasons justifying the BoC cautious approach regarding the swift withdrawal of further stimulus. Some of the key passages that caught our attention are: “There are also times when uncertainty can lead to caution or patience. Just three weeks ago, the bank decided to leave the policy rate unchanged… One of the motivations for caution is that inflation has been in the lower end of the inflation target bands of 1 to 3 per cent for quite some time…the central bank puts a greater weight on the downside risks when inflation is low to begin with.”
In our view, this cautious approach among BoC officials is likely to remain firmly in place following tomorrow’s release of the Canadian CPI report. We expect a small 0.1% month-over-month increase in total CPI during the month of October. More precisely, higher shelter costs will be slightly offset by the lagged impact of last summer’s CAD appreciation on import prices. Sears Canada also accentuated liquidation sales before closing all its stores. This is expected to put a small dent into the clothing and household goods CPI components. If our forecast materializes, total CPI inflation will fall to 1.4% in October; it was 1.6% in September. Consequently, the three core inflation measures BoC officials are tracking are likely to move away from the 2% inflation target as well (they also averaged 1.6% in September).
Beside low inflation figures, Wilkins also attributed the BoC’s cautious stance to the uncertain sensitivity of household spending to interest rate increases and the indeterminate impact of the recent tightening of macro prudential rules on homebuyers (namely the new B20 guidelines reducing borrowers’ access to the uninsured mortgage market). Altogether, there is a risk that the next 25bps hike by the BoC could be delayed to the spring or summer of 2018; our current expectation was, until recently, of a 25bps increase in the policy rate in January 2018. We now see, at best, the BoC raising its policy rate once by 25 basis points in 2018, later during the year. Our year-end 2018 forecast for the overnight rate target is still 1.25%. Beyond 2018, it wouldn’t be realistic to expect the BoC to hike its policy rate 3 to 4 times per year. Notably, a new article released this morning in the autumn’s edition of the BoC Review explains how a lower potential GDP growth in Canada and a lower global neutral rate have contributed to lower Canada’s real neutral rate midpoint estimate to 1.00%, down 50 basis points from the previous estimate made three years ago. Thus, this article suggests that only a few more policy rate hikes could be required to completely remove the bank’s remaining monetary stimulus.
Finally, Wilkins ended her speech by revealing a key change in the BoC’s communication strategy: “We also have speeches like this one today. We have decided, starting next year, to advance the timing of speeches providing economic updates to align them more closely with the fixed announcement dates between MPRs. These speeches will be given by Governing Council members and will be followed by a question-and-answer session with media.” According to the 2018 schedule, the March 7th, May 30th, Sept. 5th and Dec. 5th fixed announcement dates are not accompanied by a MPR nor a conference. Market participants should, therefore, from now on pay closer attention to speeches that may be given 2 to 3 weeks before these four policy decision statements.