The Conference Board of Canada’s Chief Economist Craig Alexander and Principal Economist Alicia MacDonald offers the following insights on today’s Bank of Canada interest rate announcement:
“A pause in interest rate increases is prudent against a backdrop of geopolitical risk. Nevertheless, the dovish tone from the Bank of Canada was surprising. With the economy quickly absorbing its excess capacity and growth in labour productivity suggesting a forthcoming acceleration in wage gains, we continue to believe that three interest rate increases are warranted before the end of 2018,”
—Craig Alexander, Senior Vice-President and Chief Economist, The Conference Board of Canada.
- After two consecutive rate increases in July and September, the Bank of Canada maintained it’s target for the overnight rate at 1.0 per cent in October.
- The tone of the accompanying press release was surprisingly dovish with the Bank stating that it would be cautious in making further changes to interest rates.
- One of the factors highlighted in todays release was the degree of labour market slack which the Bank claimed would allow the economy to continue to grow without brining inflation materially above target.
- The interest rate decision was accompanied by the release of the latest Monetary Policy Report (MPR). In its latest MPR, the Bank revised up its real GDP forecast to growth of 3.1 per cent this year and 2.1 next year. Interestingly, the Bank reported the output gap to be the midpoint of the -0.5 to 0.5 per cent range. In essence, the Bank is saying that the economy is now operating at full capacity.
- Recent gains in productivity have yet to translate into higher labour compensation. However, but we expect that a pickup in wages is imminent. Combined with a diminishing labour market slack could increase inflation quicker than the banks expects.
- Accordingly, against a back drop of above potential growth and inflation quickly returning to 2.0 per cent, we continue to believe that a steady withdraw of monetary stimulus is appropriate and that the Bank of Canada will raise interest rates three more times before the end of next year.