Very strong confidence in the Canadian economic recovery led BoC officials to increase the overnight rate target by 25
basis points for the second time in eight weeks. The BoC policy rate now stands at 1.00%.
VIP Call Girl Service Andheri West ⚡ 9920725232 What It Takes To Be The Best ...
LBS Economic Research and Strategy - Bank of Canada Decision – September
1.
Bank of Canada Decision – September
Very strong confidence in the Canadian economic recovery led BoC officials to increase the overnight rate target by 25
basis points for the second time in eight weeks. The BoC policy rate now stands at 1.00%.
The BoC statement begins with a very upbeat commentary on the broad-based strength in consumer spending, business
investment and exports. Overall, stronger-than-expected domestic economic activity was sufficient to look beyond global
geopolitical risks and uncertainties related to U.S. trade and fiscal policies. Also, in contrast to our expectation, the BoC did
not judge that low CPI inflation justified pausing until at least next October. Instead, the BoC puts faith in the standard
argument that above-trend growth leads to higher inflation. The BoC thinks that the small increases in total CPI inflation
(from 1.0% to 1.2%) and core inflation measures (from 1.4% to 1.5%) observed between June and July marks the
beginning of sustained increase in inflation.
In an attempt to prevent markets from thinking that back-to-back 25 basis points increases in the policy rate imply an
aggressive hiking path in the future, the BoC ends its statement with a more dovish commentary: “Future monetary policy
decisions are not predetermined and will be guided by incoming economic data and financial market developments as they
inform the outlook for inflation”. One soft spot highlighted is the weak wage inflation observed despite the decline in
unemployment. For instance, average hourly earnings (AHE) are up by only 1.3% on a year-over-year basis. A sign of
acceleration in this wage measure will facilitate further removal of monetary stimulus in the coming months. Thus, markets
should pay attention to the next AHE data point for the month of August which will be reported in Statistics Canada’s LFS
report on Friday morning.
Also, given the elevated 100% household debt-to-nominal GDP ratio (see the chart below), the BoC states that it will pay
close attention “to the sensitivity of the economy to higher interest rates”. Since the beginning of June for instance, the
Canadian 2-year bond yield has increased by more than 70 basis points while the 10-year yield has risen by less than 50
basis points. This led, so far, to a significant flattening of the yield curve. Indeed the yield curve has now flattened close to
levels unseen since 2008. Such flattening should be monitored cautiously as this may pressure bank margins and lead to a
tightening in credit conditions (see the chart below). The good news is that, as we have yet not seen a significant widening
in corporate credit spreads, an imminent economic slowdown seems unlikely. However, we are of the view that future
changes in credit spreads need to be monitored closely as a warning signal of economic deterioration.
Finally, it remains to be seen to which extent higher interest payments will reduce discretionary spending and how higher
rates will affect housing demand. For Canadians carrying an existing mortgage (based on an average mortgage balance of
$235K), we estimate that each 25 basis points increase in rates will raise the average annual mortgage payment by $360.
For a new mortgage (based on the Canadian average resale home price of about $500K and a 20% down payment), we
evaluate the annual impact of a 25 basis points hike to be $630. The recent Bank of Canada decisions may thus convince
more households to remain in the rental market.
Sébastien Lavoie | Chief Economist, 514 350-2931 | lavoies@vmbl.ca
Éric Corbeil | Senior Economist, 514 350-2925 | corbeile@vmbl.ca
2. Economic Research and Strategy
This document is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee
of Laurentian Bank Securities (LBS), a wholly owned subsidiary of the Laurentian Bank of Canada. The author has taken all usual and reasonable precautions to determine that the information contained in this document
has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze it are based on accepted practices and principles. However, the market forces underlying investment value
are subject to evolve suddenly and dramatically. Consequently, neither the author nor LBS can make any warranty as to the accuracy or completeness of information, analysis or views contained in this document or their
usefulness or suitability in any particular circumstance. You should not make any investment or undertake any portfolio assessment or other transaction on the basis of this document, but should first consult your
Investment Advisor, who can assess the relevant factors of any proposed investment or transaction. LBS and the author accept no liability of whatsoever kind for any damages incurred as a result of the use of this
document or of its contents in contravention of this notice. This report, the information, opinions or conclusions, in whole or in part, may not be reproduced, distributed, published or referred to in any manner whatsoever
without in each case the prior express written consent of Laurentian Bank Securities.