Bank of Canada monetary policy preview

Today, Bank of Canada (BoC) is to provide further guidance in policy meet. The result of the monetary policy meeting is scheduled to be announced at 14:00 GMT.

Current policy measures–

• Stronger economic rebound and higher inflation have prompted the central bank to raise rate thrice in 2017. Since July last year, it has hiked thrice by 25 basis points each time.

The core objective of BoC monetary policy is price stability which means keeping inflation within a range of 1-3 percent. The headline inflation is currently at 2.2 percent, it has been showing lots of volatility lately.

Economy at a glance:

• Canada is a very small economy of $1.53 trillion approximately, compared to its larger neighbor, the United States.
• Canada suffered technical recession last year as GDP contracted in both first and second quarter of 2015. As of December 2015, annual GDP growth rate has dropped to 0.3 percent from 3.1 percent two year ago. From there, it bounced back to 3.7 percent in the third quarter of 2017 and declined to 2.9 percent as of the first quarter of 2018.
• The unemployment rate has declined to 5.8 percent, lowest since 2008/09 crisis.
• The Canadian housing sector has come under strain in recent times after big price rises in previous years.

Return of growth in the US is expected to help the Canadian economy as a whole. However, President elect Donald Trump’s trade policies could pose concerns, along with his other policy uncertainties.

Expectation –

Since 2017, BoC policymakers, especially Governor Stephen Poloz stepped up the hawkish rhetoric and suggested that the possibility of a hike remains in play. The governor has followed through his words and hiked thrice. Since he has signaled a pause after three hikes, another one is not expected today. Instead, the focus will be on future guidance.

With inflation hovering within BoC’s range, it has room to be patient.

Impact:

Since BoC’s suggestions in early June, the Canadian dollar has strengthened from 1.35 per dollar to 1.206 by September, riding on two rate hikes. It has since come under strain over oil price, low inflation, and NAFTA negotiations. Moreover, Canadian crude, known as West Canada Select (WCS) is trading at large ($27 per barrel) discount to Brent.

The recent strength of the U.S. dollar has pushed the Canadian dollar to 1.298 per dollar as of today.

Since the focus will be on future guidance, the movements would depend on wordings.  The Canadian dollar is currently trading at 1.292 per U.S. dollar.