Rates To Remain At 0.5%

The Bank of Canada meets later today for its October rates meeting. Markets are broadly expecting the bank to keep rates unchanged at 0.50%. At the September meeting, the bank noted that “risks to the profile for inflation have tilted somewhat to the downside since July” but also added that “the bank’s governing council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate”. In light of these comments, it seems reasonable to expect that the bank will retain this stance and remain on hold.

Statement To Note Downside Risks

However, the statement itself is likely to see the bank reiterating that inflation risks remain skewed to the downside and thus a lowering of the bank’s growth forecast can also be expected from the Monetary Policy Report.

Economic data over the recent month has been strong and consistent with the bank’s forecast of a “substantial rebound in the second half of this year”. However, the majority of this strength is coming from a normalisation in activity in the wake of the disruption caused by the Alberta wildfires.

Despite this rebound, there are indications that underlying momentum remains weak. Of note is the continued underperformance in non-energy exports reflects that improvement in the trade balance is mainly a function of the normalisation in Oil exports.

In terms of gauging the BOC’s rate path over the remainder of the year there are two key factors to consider 1) Given the continued underperformance in non-energy, is the recent rebound in exports sustainable?  2) What will be the impact of fiscal stimulus?  Further clarity on both these questions is needed, and until such a time, the BOC is likely to remain in wait and see mode.

On The Data Front

Key economic readings since the last meeting have printed strongly. Monthly GDP was up 0.5% in July, beating market expectations. Led by a surge in the energy sector, the goods-producing side of the economy contributed the most growth in July with growth excluding mining, oil and gas coming in at a more modest 0.2% on the month.

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