BoC Holds Rates Expressing Trade Uncertainty as a Concern

Talking Points:

– The Bank of Canada (BoC) left the overnight lending rate unchanged at 1.25%, as was widely expected

The Central Bank expressed concerns over trade and subdued export growth

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The Bank of Canada has held the overnight lending rate at 1.25% for the second meeting in row this morning. Though this was largely expected as markets priced in an 80% chance of the Central Bank holding going into today’s meeting.

Looking ahead, markets are losing faith in a second 2018 hike in the second quarter. At the May meeting, the final meeting in 2Q, the probability stands at just 50%. Although, the probability of a hike in July stands at 76.5%. But of course, much can happen between now and then to revise that expectation.

The BoC released their monetary policy report at this month’s meeting. We have noted the most important points below:


  • “Inflation in Canada is close to 2 per cent as temporary factors that have been weighing on inflation have largely dissipated, as expected.”
  • “The transitory impact of higher gasoline prices and recent minimum wage increases will likely cause inflation in 2018 to be modestly higher than the Bank expected in its January Monetary Policy Report”

Geopolitical tensions:

  • The outlook for the U.S. economy has been further boosted by new government spending plans. However, escalating geopolitical and trade conflicts risk undermining the global expansion.


  • GDP growth in the first quarter was weaker than the Bank had expected, but shouldrebound in the second quarter, resulting in 2 per cent average growth in the first half of 2018.”


  • “Housing markets responded to new mortgage guidelines and other policy measures by pulling forward transactions to late 2017.”
  • Some of the weakness in housing and exports is expected to be unwound as 2018 progresses.

Trade and Exports:

  • “Export growth is being increasingly limited by capacity constraints in some sectors. Continued gains in business investment shouldbuild additional capacity in those sectors and in the economy more generally.
  • “Bothexports and investment are being held back by ongoing competitiveness challenges anduncertainty about trade policies.”

In addition, here’s a list of recent economic data that came out of Canada since the BoC last meeting in March:

GDP YoY (beat): 2.7% versus 2.9% expected, 3.4% (revised up)


CPI YoY (beat): 2.2% versus 1.9%, 1.7% previous

Retail sales:

Retail Sales MoM (miss): 0.3% versus 1.1% expected, -0.7% (revised up) previous

Retail Sales Ex Auto MoM (beat): 0.9% versus 0.8% expected, -1.7% (revised up) previous


Unemployment rate: 5.8% versus 5.8% expected, 5.8% previous

Net change in employment (beat): 32.3k versus 20.0k expected, 15.4k previous

Full-time employment change: 68.3, -39.3 previous

Part-time employment change: -35.9, 54.7 previous


Housing starts (beat): 225.2k versus 216.8k expected, 231.0k (revised up) previous

New Housing Price Index YoY (miss): 2.6% versus 3.0% expected, 3.2% previous

Building permits MoM (miss):-2.6% versus -1.3% expected, 5.2% (revised down) previous


Manufacturing sales MoM (beat): 1.9% versus 0.8% expected, -1.3% (revised down) previous

The BoC also estimated that economic activity is should come in at 1.3% for Q1 but rebound for 2Q to 2.5%. The Central Banks also expects disruptions of exports to dissipate accounting for the rebound in economic growth for the second quarter. In addition, below is a summary table of the BoC’s inflation projections:

The Bank did not forecast the Canadian Dollar exchange rate but does project USD/CAD to remain at around $0.78, versus $0.79 in January and $0.81 in October. Other projections include a modest pick-up in wages, inflation running close to 2%, and moderate expansion in business investment.

Finally, The Central Bank stated outright that “a wide range of outcomes are still possible for the North American Free Trade Agreement” (NAFTA). Trade has been a consistent concern recently. An increase in those concerns could lead to a “shaper-than-expected tightening of financial conditions.” This may have been at the forefront of the Central Bank’s decision today.

Chart 1: USD/CAD 60-minute Chart (April 5 – 18, 2018)

Today’s monetary policy meeting yielded a favorable outcome for the dollar. Buyers came in strong pushing USDCAD to 1.2636. Shortly after, sellers pushed Loonie down to 1.2584. In all, a less-hawkish BoC disappointed CAD bulls.

— Written by Dylan Jusino, DailyFX Research

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