BoC points to stronger economy; market sees rate hike drawing closer
Assessing whether monetary policy stimulus presently in place is still required.
OTTAWA — The Bank of Canada is encouraged by a broadening of economic strength, which includes gains across 70% of industries, a top official said, in what was widely seen as a “hawkish” speech from the country’s central bank.
Senior deputy governor Carolyn Wilkins said the gains are something Canada hasn’t seen since before the oil-price collapse nearly three years ago. Analysts said these and other comments suggest the central bank is beginning to assess when, not if, the bank might introduce its first rate increase in nearly seven years.
For nearly two years, the rate has been locked at the very low level of 0.5% as a way to help lift the economy.
“As growth continues and, ideally, broadens further, (the bank’s) governing council will be assessing whether all the considerable monetary policy stimulus presently in place is still required,” Wilkins said in a speech delivered at the Asper School of Business in Winnipeg.
“Just think about it, if you saw a stop light ahead, you would start letting up on the gas so that you could slow down smoothly. You don’t want to have to slam on the brakes at the last second. Monetary policy must also anticipate the road ahead.”
But despite the bank’s brightening outlook, Wilkins underscored several lingering uncertainties that suggest it won’t be ready to raise its benchmark as early as its next scheduled announcement July 12.
She pointed to unknowns surrounding US economic policy and Canada’s recent below-target inflation readings, as well as employment weaknesses in wage growth and the number of hours worked.
Experts noted how the speech was filled with optimism about the economy’s trajectory.
“The hawkish nature of the speech is the first acknowledgment from the bank that the next move is likely to be a hike,” CIBC’s Royce Mendes wrote in a research note to clients.
TD senior economist Brian DePratto wrote: “Rather than signalling imminent action, today’s remarks are more likely to be aimed at preparing markets for eventual monetary tightening.”
He added that TD is predicting the next rate hike in early 2018.
Looking at the positives, Wilkins credited strength in consumer spending, the services sector and the housing markets for helping carry Canada over the last few years.
She said Canada is now seeing an expansion of business investment, particularly in the energy sector, and “broadening” economic activity across the provinces as reasons for optimism.
The economy’s sources of strength also come from a number of sources, she added.
“What’s encouraging is that this growth is not being driven by just a few key industries,” Wilkins said.
“More than 70% of industries have been expanding – and that’s a rate we haven’t seen since the oil-price shock. It’s the kind of diversity that helps support strong and sustained overall growth.”
Following months of improving economic indicators, a growing number of analysts have been saying it’s increasingly difficult for the bank to find reasons to hold back from raising its trend-setting rate.