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Bank of Canada on hold, but strikes a cautious tone - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Apr 13, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Analysts at Nomura noted, that as widely expected, the Bank of Canada (BoC) kept its policy rate unchanged at 0.5% and reiterated its neutral policy stance, saying that “the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate”.

    Key Quotes:

    "This suggests that the BoC is not considering any changes to monetary policy for the foreseeable future. Interestingly, while the BoC upgraded its forecast for 2016, the statement remains very cautious. On the global economy, the BoC now believes that global growth is expected to be weaker than in the January MPR. Moreover, while the US economy is expected to “regain momentum”, there is a lower level of activity than previously expected and a composition of growth “that is less favourable for Canadian exports”.

    This means a weaker contribution to growth from net exports. On the domestic economy, the BoC acknowledges that growth in the first quarter will be “unexpectedly strong”, with the BoC expecting 2.8% q-o-q ar. However, the BoC also cautioned that “some of that strength is due to temporary factors and is likely to reverse in the second quarter”, with growth expected at 1.0% q-o-q ar.

    On business investment, “the Bank expects deeper cuts to investment in Canada’s energy sector” than forecast in January. Nevertheless, the BoC continues to expect that business investment should turn positive by the end of the year. Non-resources exports are expected to pick up this year, but this increase is forecast to be weaker than previously expected because of the stronger CAD and weaker foreign demand.

    Despite all these headwinds on the Canadian economy, the BoC raised its growth forecast for 2016 to 1.7% from 1.4%, while growth from 2017 inched lower to 2.3% from 2.4%. As a result of the stronger growth and a lower estimate of potential growth, the BoC expects the output gap to close in the second half of 2017. The higher growth in 2016 is mainly the result of increased fiscal spending, which the BoC expects to contribute 0.3pp to growth in 2016 and 0.3pp in 2017, weaker than the Department of Finance’s expectations.

    This means that without fiscal stimulus, growth would have been forecast at 1.4% in 2016 and 2.0% in 2017, much weaker than the January forecast. This suggests that the underlying momentum in the economy is weaker than in January. On inflation, the outlook remained roughly unchanged with total CPI inflation expected to remain weak because of low oil prices. On its side, core inflation is forecast to remain close to the BoC’s 2% target, as the impact of past CAD depreciation will be offset by excess capacity.

    Overall, while the BoC kept rates unchanged and upgraded its forecast, these higher growth expectations are mainly the result of fiscal stimulus. As such, if the impact from the fiscal stimulus is excluded, momentum in the economy looks weaker than in January. This suggests that without increased fiscal spending, the BoC would have likely needed to cut rates. Nevertheless, because of the impact of fiscal stimulus and the expected growth, we continue to believe the BoC will keep its policy rate unchanged for the rest of the year."
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