With the weaker than expected growth in Q4 GDP reported last week, it should not have been a surprise to see the Bank of Canada hold the line on rates and Mr. Poloz and crew held the overnight target at 1.25% after the somewhat more surprising decision to hike in January.
Specifically, the Bank cited a deceleration in household credit growth and lower than normal wage growth as reasons for the wait and see decision today. More recently, the Bank is looking at trade developments (read NAFTA and Trump’s tariffs) as a ‘growing source of uncertainty’. On that point, if we were to see continued negative developments and a spreading of trade protectionism globally, then we would assume the Bank of Canada would stand pat on rates for a while longer. Given that the market had priced in no action today, the Canadian dollar showed little response to the decision, and the Loonie has already come off the boil significantly since late January. In breaking below 77 US cents this week the Bank has room to move higher on rates, but only if the above mentioned risk factors do not escalate. In terms of bond yields, we have seen calm in recent weeks, with improvement in bond sentiment from late January. The 5yr Govt of Canada bond yield has drifted back to 2% and we will likely remain range bound until the Bank either dials down its level of caution or removes 2018 tightening guidance directly.