Tomorrow, a 25 bp rate hike is as close to a done deal as is possible for policy. Recent economic data does, however, provide a strong argument for officials to maintain an explicit commitment to gradually moving rates back to normal.
In September, the Bank repeated that “higher rates will be warranted to keep inflation near target,” as recent data now “reinforce” their view (in July they “expected that higher interest rates will be warranted”). But the Bank assured a “gradual approach” will continue to be taken, “guided by incoming data.” But will the assurance to maintain a “gradual approach” remain in place in the October announcement?
Full capacity growth and 2% core inflation saw the Governing Council ponder that issue in September, said Wilkins. Poloz subsequently (September 27) assured that gradual is fully in place, which in eliminates the chance that officials would elect to remove gradual this month.
However, the USMCA trade deal resuscitated the risk that gradual will be dropped tomorrow. The announcement will be accompanied by the MPR, giving the Bank a suitable platform to discuss the impact of USMCA on its growth/inflation outlook and how officials view the balance of risks around the growth and inflation estimates.
Recall that trade, and NAFTA in particular, was the main source of uncertainty around the Bank’s outlook. Therefore officials’ remarks are considered to be significant on tomorrow’s press conference.
Doubtful, as it is widely expected, the Bank would like to see at least some hard data showing the extent of the presumed lift to growth prospects from USMCA. In the meantime, the deal is likely to:
- Eliminate the main source of downside risk to the growth outlook
- Leave upside risk to the Bank’s 2019 GDP projection of 2.2% and 1.9% in 2020. Also, the Bank has pegged the investment channel as a prominent beneficiary of a trade deal, which would both boost growth and expand capacity — a combination that is actually supportive of measured pace of normalisation.
Meanwhile, adding to the backing for “gradual” is the evolving housing market that the Bank is still “monitoring” and an economy that is considerably more sensitive to rate hikes than before the great recession. Also, total CPI did ease from 3% in August, as expected, while the core is holding at 2%. Therefore, it seems that there is no need to eliminate gradual policy yet.
Hence, the 25 bp rate hike in October will conclude policy action for the year. Three to four 25 bp hikes are seen for 2019, up from the two to three that were anticipated before the USMCA deal.
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