Bank of Canada Throws Economic Caution to the Wind

September 6, 2017

While most economists expected the Bank of Canada to use language from today’s policy meeting to reinforce its guidance for higher rates by end of year, few predicted it would push rates again right now. Wrong. The Bank again showed its ability to surprise by raising its official rate another quarter point to 1%. It cited a broader economic expansion and sees it becoming self-sustaining. On top of that Mr. Poloz and crew see strength in business investment and exports as a reason for further tightening, although in the Bank’s jargon this is more about removing excessive stimulus than necessarily tightening. Having said that, the bank is aware of the geopolitical risks at large and says it is watching for the economy’s sensitivity to higher rates (read between the lines and you will see ‘housing’), in addition to how a stronger CAD dollar may impact growth.

The latter is one reason why economists felt the Bank would want to wait for fresh data from the third quarter before pulling the trigger on another hike since we do not know what impact the higher Loonie is currently having. With the announcement, the CAD dollar spiked to close to 82 US cents, or almost a dime higher than where it was in May. I believe this is an overshoot and that we will see a drag on growth this half. If so, this could be the last hike of the year, especially if geopolitical and market risks become more predominant. In which case it might be a time to lock in some US dollar exposure.