While the Bank of Canada did not surprise with its interest rate decision, holding rates at 0.5% as expected, the market has read between the lines of the statement and concluded that it was substantially more optimistic than expected, with clear hawkish notes as a result of the following line: “The Canadian economy’s adjustment to lower oil prices is largely complete and recent economic data have been encouraging, including indicators of business investment.”
Additionally, the BOC has added a new line which now reads: “all things considered, Governing Council judges that the current degree of monetary stimulus is appropriate at present, and maintains the target for the overnight rate at 1/2 per cent” and replacing the previous conclusion which said there was “significant uncertainty on the outlook.”
And while the BOC hedged by saying “the uncertainties outlined in the April MPR continue to cloud the global and Canadian outlooks” the market is clearly more impressed by the hawkish readthru, sending the Loonie surging after the report.
Some other observations from the report:
- On inflation: “The Bank’s three measures of core inflation remain below two per cent and wage growth is still subdued, consistent with ongoing excess capacity in the economy.”
- On housing: “Consumer spending and the housing sector continue to be robust on the back of an improving labour market, and these are becoming more broadly based across regions. Macroprudential and other policy measures, while contributing to more sustainable debt profiles, have yet to have a substantial cooling effect on housing markets. Meanwhile, export growth remains subdued, as anticipated in the April MPR, in the face of ongoing competitiveness challenges. The Bank’s monitoring of the economic data suggests that very strong growth in the first quarter will be followed by some moderation in the second quarter.”
End result: the USDJPY has tumbled to 5 week lows.
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