What to Look For in Poloz's Bank of Canada Rate Decision Wednesdayby
BoC governor may reiterate stimulus remains an option
Quarterly policy report also due Wednesday from Ottawa
The big question for Wednesday’s rate announcement is whether Bank of Canada Governor Stephen Poloz downplays some of the biggest signs yet of a recovery from an oil shock, and plays up risks associated with the Donald Trump presidency.
Here’s what investors and economists should look for in the one-page rate decision and a quarterly forecast paper released at 10 a.m. from Ottawa, and at an 11:15 a.m. press conference.
Poloz began the last quarterly press conference in October by saying policy makers “actively discussed” a rate cut, jolting Canada’s dollar more than the decision itself. He may reiterate a rate cut is still an option, especially after recent statements from U.S. President-elect Trump on imposing border tariffs.
But don’t expect any change in rates. Swaps trading puts zero probability of a rate hike and negligible odds of a cut. Twenty economists predict no change to the central bank’s 0.5 percent benchmark rate, while two predict a quarter-point cut.
For most, this rate decision is more about whether the Bank of Canada tells investors it will keep its rate cut options on the table, despite a pick-up in the economy, because of risks from Trump’s protectionism.
“Given where the economy is, I’d be surprised if they weren’t actively considering all of their options,” said Ben Homsy, fixed-income portfolio manager at Leith Wheeler Investment Counsel Ltd. in Vancouver, which manages C$16 billion ($12 billion) in assets.
Most indicators show the country’s economy is on the mend, as the Bank of Canada had forecast it would be at its last quarterly report in October. A survey of executives taken by the bank and released this month show businesses are the most optimistic about investment and hiring since the 2014 oil shock.
Reports this month also showed an unexpected surge in full-time employment and the first trade surplus in more than two years. The latest economist forecasts are still more or less in line with the October Monetary Policy Report estimates for growth of 2 percent this year and 2.1 percent in 2018.
In addition, swaps trading shows about a 33 percent chance of a rate increase by the end of 2017, according to Bloomberg calculations.
Investment and exports may falter if Trump renegotiates the North American Free Trade Agreement or imposes a border tax. These all-or-nothing scenarios could qualify as shocks under Poloz’s “risk management” framework. Until these significant uncertainties are resolved, he’ll likely remain on the sidelines -- whether pressures are up or down.
“Poloz’s main worry is the Trump factor which will lead him to wait and see what happens south of the border,” Pierre Siklos, economics professor at Wilfrid Laurier University and a former central bank adviser, said by e-mail.
Since the Bank of Canada is an inflation-targeting central bank, its forecasts for consumer prices matter. Inflation hasn’t exceeded 2 percent for about two years, and Poloz recently tossed out his core price measure for three new ones to get a better handle on what weakness is longer lasting. The new measures will show inflation pressures remain below 2 percent, a sign that slack remains in the economy.
“I’m not seeing any signs that domestic or globally inflationary pressure is really taking root,” Robert Spector, portfolio manager at MFS Investment Management Canada, said by phone from Toronto. “Canadian inflation seems to running significantly below target.”