Bank of Canada leaves interest rates unchanged at 1.25%, as expected

Highlights of the Bank of Canada interest rate decision

• 23 of 25 economists were expecting no change
• The OIS market had priced in a 20% chance of a hike
• Says progress on inflation and wages reinforces that higher rates will be needed over time
• Policy accommodation will still be needed to keep inflation on target
• BOC says monitoring economy’s sensitivity to higher interest rates
• Repeats that BOC will be cautious with respect to future hikes
• Inflation close to 2% as temporary factors dissipate, rise in core consistent with little economic slack
• Q1 GDP weaker than expected, rebound seen in Q2
• Cuts Q1 GDP forecast to 1.3% from 2.5%
• Sees Q2 at 2.5%
• Raises potential output growth to 1.8% in 2018-2020 period and 1.9% in 2021
• Global economy on modestly stronger track
• Escalating geopolitical and trade conflicts risk undermining global expansion
• Wages have continued to pick up as expected, labor market will continue to be assessed for signs of remaining slack
• Some of the Q1 weakness In housing and exports to be unwound as 2018 progresses
• 2018 growth trimmed to 2.0% from 2.2%
• 2019 growth boosted to 2.1% from 1.6%

USD/CAD rose on the headlines to 1.2610 from 1.2550. I don’t see much for the hawks in the statement. It looks more like a wait-and-see than a hawkish hike.

Note, however, that the comments on inflation and wages were included in the final BOC paragraph, which is the one that sends the strongest signal:

“Some progress has been made on the key issues
being watched closely by Governing Council, particularly the dynamics
of inflation and wage growth. This progress reinforces Governing
Council’s view that higher interest rates will be warranted over time,
although some monetary policy accommodation will still be needed to keep
inflation on target. The Bank will also continue to monitor the
economy’s sensitivity to interest rate movements and the evolution of
economic capacity. In this context, Governing Council will remain
cautious with respect to future policy adjustments, guided by incoming
data.”