CANADA ECONOMICS: CIBC Still Expects Next Rates Move Will Be Up, In First Half of 2015
CIBC says the Bank of Canada's statement and MPR, as expected, retains a "broadly dovish flavour", although the bias as before remains broadly balanced between a possible rate reduction and potential increase. Further stressing its continuing concerns about inflation, downsides risks on that front are seen as having "grown in importance." Offsetting that to some extent, the Bank has slightly upgraded its near-term growth projections for the Canadian economy. The risk from household balances has not materially changed.
The Bank now sees GDP expanding by 2.5% this year, two ticks faster than previously, while paring a tick from 2015, which is now seen as coming in at 2.5%. Both those estimates are slightly stronger than CIBC's own expectations.
CIBC notes the output gap is still expected to close over the next two years. Core inflation is still seen as returning to near-2% by late 2015, although performance in the near-term will be weaker than expected previously, consistent with recent observed performance. The policy section of the statement adds the sentence that "the timing and direction of the next change to the policy rate will depend on how new information influences the balance of risks." CIBC says the reference to "direction" affirms the notion that the Bank sees the risk of a rate cut as likely as an increase, although CIBC has not changed its own view that the next move will be an increase in the first half of 2015.
"Slightly supportive for fixed income given that change, and a negative for the dollar although investors were expecting a dovish statement, which may limit market reaction. Attention now shifts to Poloz PC in just over an hour and key reports on retail sales and consumer prices later in the week."
- Peter Buchanan, CIBC WM