In the statement accompanying its latest decision, the Bank of Canada remained stubbornly hawkish, acknowledging slowing economic momentum, while retaining a firmly optimistic view on the longer-term outlook. With the next Monetary Policy Report scheduled to land in late October, the Bank reverted to its July projections, suggesting that economic slack will disappear – and rate increases could begin – in the second half of 2022.
Policy settings were left unmoved: Central bankers kept interest rates and quantitative easing volumes unchanged, saying that the benchmark policy rate would remain near the lower bound until the 2 percent inflation target is “sustainably achieved”.
Officials acknowledged recent economic weakness, but pinned much of the blame on supply chains: The statement said “GDP contracted by about 1 percent in the second quarter, weaker than anticipated in the Bank’s July Monetary Policy Report,” but “This largely reflects a contraction in exports, due in part to supply chain disruptions, especially in the auto sector”. Housing market activity slowed, yet this unfolded “largely as expected”.
Last week, Canada’s national statistics agency said the economy contracted -1.1 percent in the second quarter, with weakness expected to continue into July.
Employment gains were noted: According to the statement, job growth “rebounded through June and July, with hard-to-distance sectors hiring as public health restrictions eased. This is reducing unevenness in the labour market, although considerable slack remains”. According to our calculations, Canada’s labour market remains roughly 450,000 positions smaller than the Bank’s pre-pandemic trend level estimate.
The Bank continued to look through elevated inflation rates: Price gains that have been “boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks” are expected to be “transitory”. A much-feared “wage price spiral” looked unlikely, as salary increases stay low and “medium-term inflation expectations remain well-anchored”.
The loonie round-tripped in response: The Bank’s “hawkish hold” briefly put a tailwind behind the Canadian dollar, but this was erased as the greenback moved higher against all its major rivals.
Bottom line: The Bank of Canada remains one of the most hawkish central banks in the Group of Seven. Markets expect asset purchases to move into neutral by early next year, with three rate hikes coming by the end of 2023. This should help the loonie remain well supported ahead of the October rate decision – but the path there is strewn with risks, from the upcoming federal election to the US debt ceiling debate. Volatility is likely to ratchet higher from the lows reached in mid-August.
“Cambridge Global Payments” is a trade name, which in this document refers specifically to one or more of these legal entities: Cambridge Mercantile Corp., Cambridge Mercantile Corp. (U.S.A.), Cambridge Mercantile Corp. (Nevada), Cambridge Mercantile (Australia) Pty. Ltd.
Cambridge Global Payments (“Cambridge”) provides this document as general market information subject to: Cambridge’s copyright, and all contract terms in place, if any, between you and the Cambridge entity you have contracted with. This document is based on sources Cambridge considers reliable, but without independent verification. Cambridge makes no guarantee of its accuracy or completeness. Cambridge is not responsible for any errors in or related to the document, or for damages arising out of any person’s reliance upon this information. All charts or graphs are from publicly available sources or proprietary data. The information in this document is subject to sudden change without notice.
Cambridge may sell to you and/or buy from you foreign exchange instruments (including spot and/or derivative transactions; both kinds are here called “FXI”s) covered by Cambridge on a principal basis.
This document is NOT: 1) Advice of any kind, or 2) Approved or reviewed by any regulatory authority, or 3) An offer to sell or a solicitation of an offer to buy any FXIs, or to participate in any trading strategy.
Before acting on this document, you must consider the appropriateness of the information, based on your objectives, needs and finances. For advice, you must contact someone independent of Cambridge.
Certain FXIs mentioned in this document may be ineligible for sale in some locations, and/or unsuitable for you. Contact your Cambridge representative for further information regarding product availability/suitability before you enter into any FXI contract.
FXIs are volatile and may cause losses. Past performance of a FXI product cannot be relied on to determine future performance.
This document is intended only for persons in Canada, the US, and Australia. This document is not intended for persons in the UK or elsewhere in the EEA. In Australia, this publication has been distributed by Cambridge Mercantile (Australia) Pty. Ltd. (ABN 85 126 642 448, AFSL 351278); for the general information of its customers (as defined in the Corporations Act 2001). This entity makes no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law.
Fees may be earned by Cambridge (and its agents) in respect of any business transacted with Cambridge.
The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact the applicable Cambridge if you wish to use Cambridge services to enter a transaction involving any instrument mentioned in this document.
© Copyright 2018, Cambridge Mercantile Corp., ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Cambridge Mercantile Corp. See www.cambridgefx.com for contact details.