By Ketki Saxena
Investing.com -- On Wednesday, the Bank of Canada will make its monetary policy decision.
With data last week showing a cooldown in inflation and retail sales, and the Canadian economy in a stall, markets are betting on a hold from th Bank of Canada at 5%.
The counterargument however is the strong labour market, with the September jobs report coming in well above estimates.
Desjardins economist Royce Mendes summarizes the “conflicting readings on the temperature of the economy”.
Mendes notes, “The labour market keeps churning out jobs, and workers are expecting that to translate into heady pay raises. Complicating the matter, consumers also expect inflation to remain elevated. Conversely, businesses have soured on the economic outlook and plan to restrain employee compensation growth.”
Mendes also touches on the recent surge in bond yields doing some of the work for the Bank of Canada
“Make no mistake, the recent rise in bond yields is indeed a substitute for a rate hike. So while data on businesses and households has been mixed, there’s little question that financial conditions have tightened enough to offset any unanticipated strength in the economy. “
Nathan Janzen and Claire Fan, Economists at Royal Bank of Canada (TSX:RY) also iterate that “Economic data releases since the Bank of Canada opted to forego an interest rate hike in September have been mixed”.
However, the RBC economists note that on net, the economic data on net has “made a hike at next week’s decision unlikely.” In particular, they point to September’s inflation data, “which looked decidedly better, with slower growth in the BoC’s preferred ‘core’ measures breaking a string of upside surprises.”
Benjamin Reitzes of BMO (TSX:BMO) Economics notes that although “The level of inflation remains much too high for comfort, the trend is the BoC’s friend here. Given that inflation is the most lagging of indicators, and the economy is clearly weakening, we’re likely to see ongoing disinflationary pressure…there’s no need for further rate hikes in Canada.”
Matthieu Arseneau and Alexandra Ducharme of National Bank of Canada (TSX:NA) also touch on the fact that the full effect of the Bank of Canada’s rate hikes has yet to trickle through the economy.
The National Bank economists note that “It would be perilous for the Bank of Canada to remain focused on sticky inflation with real policy rate the most restrictive since 2008, given the lag in transmitting monetary policy to the economy, and even longer for inflation.”
The bottom line?
Perhaps summarized most concisely by Francesco Pesole, FX Strategist and James Knightley, Chief International Economist of ING: “Slower-than-expected inflation, a clouded growth outlook and higher bond yields means the BoC is likely to overlook jobs tightness and keep rates on hold on 25 October."