Blog – Bank of Canada Won’t Be Joining Rate Hike Party

While there has been increased speculation that the Federal Reserve will indeed raise rates in December, this morning’s policy statement from the Bank of Canada offers no such clues. The Bank kept its overnight target rate at 0.5%, however, the statement was fairly dovish on three counts. First, Mr. Poloz and crew believe the federal government’s latest housing initiatives will cool the market and shave about 0.3% off GDP out to 2018. That may turn out to be a conservative estimate, but as this sector has been one of the few engines of growth even a small contraction is not great news. Second, the Bank has downgraded its estimates for export growth given challenges in the US. Both of these factors have led the Bank to lower its inflation forecast for 2016-2018 so the take away guidance is that there will be next to no scope for a tightening in policy, even if the Fed decides to do so. The Bank does expect the energy patch to start recovering which will help, but not enough to counter a housing slowdown. I would read this statement as dovish, although the market has taken an opposite view and has bid up the Canadian dollar. I still expect the downward trend in the Loonie since early May to continue and if a next move lower takes out 75 US cents then I would look for a re-test of 72 cents by year-end, depending on how commodities fare.