The BOC Is Sticking To Its Guns For Now

The Bank of Canada left interest rates at 1.00% and kept its tightening bias unchanged, i.e. "over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 per cent inflation target. The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector."

The BoC acknowledged that "momentum appears slightly softer than previously anticipated." But the central bank viewed the weak Q3 performance as partly resulting from "transitory disruptions in the energy sector," expecting a rebound. The BoC acknowledged the moderation in credit growth but remained vigilant by saying that "its too early to determine whether the moderation will be sustained." As in its October forecasts, the BoC expects inflation to return to 2% next year.

Bottom line:
The BoC stuck to its guns yet again, viewing the Q3 slowdown as "transitory," and downplaying the moderation in credit growth. The guidance is unchanged and the bias remains. We do not share the central bank's current economic assessment.

Weakness in Q3 was much more broad-based than just energy as reflected in the overall decline in corporate profits. In non-energy manufacturing, earnings were down for the third consecutive quarter with a sharp erosion in margins. This isn't a harbinger of a strong labour market. Indeed, we are somewhat surprised that the central bank didn't acknowledge that the private sector has actually created no jobs over the past six months. Unless we see a sharp reversal of that concerning trend in the upcoming employment reports, we would expect a major change of assessment in next January's Monetary Policy Report.

With Q3 growth coming in well below the Bank of Canada's 1% estimate and the downward revision to the prior quarter, the output gap is already larger than what the BoC expected in its October MPR. Given our expectations for Q4 (half of the BoC's 2.5% projection), the "current small degree of slack" is likely to get larger. We continue to see no reason for any rate hikes before 2014.

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