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Analyst reaction to BoC rate hike

Blog by Shaun Kimmins | June 1st, 2010

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Mark Chandler, RBC Capital Markets

“It was hard to characterize today’s statement as overtly dovish, but it did seem to lay out a very ‘cautious’ plan to continue raising rates.  Not surprisingly, the central bank continued to make additional rate decisions ‘data dependent’ or – more accurately – ‘forecast dependent’. Specifically, they note that ‘any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments’ and failed to lay out much of a concrete roadmap.

The Bank had done a lot to pave the way for its first rate hike since July 2007 and the first step proved (rightly) a cautious one, given the current backdrop. They note that the decision still leaves ‘considerable monetary stimulus in place’, with ‘significant excess supply in Canada’ – the latter a bit of a stretch really by most measures – and a correct presumption of an ‘uneven global recovery’.  In the end, there is absolutely no upside in the BoC committing to a path of rate increases going forward – even though a series of 25bp increases over the remainder of the year still seems the most appropriate outcome.”

Derek Holt and Karen Cordes, Scotia Capital

“The BoC delivered the goods on a rate hike, but kept markets guessing on its next moves. Markets don’t like the lack of clarity in the bias, and CAD has therefore sold off on the statement…

This is probably the best move for a central bank under current market uncertainties, and signals a fairly neutral bias that keeps the BoC’s options open going forward.  It is the first G7 bank to hike and can lay claim to leading the charge on exits.  It followed up on having dropped the conditional commitment in the prior statement, and hiking today puts to rest the misconstrued notion that the BoC promised not to hike until July which was always a wrong interpretation of the conditional commitment anyway.  The bias is neither dovish nor hawkish, but walks the line on a cautiously optimistic view toward how developments will unfold from this point forward.  This was done not in a way that is willing to bet the house on the bias in a manner that would have sparked disproportionate market tightening through CAD and the short-end of the curve, but done in a way that still reaffirms the BoC’s seriousness about reinforcing price stability as its #1 goal.”

Rahim Madhavji, Knightsbridge Foreign Exchange

“‘The required rebalancing of global growth has not yet materialized.’ This statement sums it up. The markets were expecting a more favorable tone to today’s announcement. It was rather dovish for the Canadian dollar. Much of the today’s rate hike was priced in and the market was looking for insight in to next month’s announcement. With considerable stimulus in place, this announcement will leave traders weighing domestic economic developments vs. excess supply and events unfolding in Europe vs. growth in emerging markets.”

Avery Shenfeld, CIBC World Markets

“The Bank of Canada thinks it knows what the Canadian economy needs—higher interest rates—but isn’t so arrogant to assume that financial and commodity markets have it wrong in their recent concerns about global growth.  Hence today’s odd split decision, with Governor Carney delivering the anticipated quarter-point hike, but in a rare move, admitting that even he isn’t so sure about what comes next. Instead of the typical concluding comment that would have said that further reductions in monetary stimulus would be required to meet the inflation targets, the Bank left the door open, saying that such moves would have to be “weighed carefully against domestic and global economic developments.”

Grant Bishop, TD Economics

“Remembering that monetary policy only impacts with a lag, the exceptional near-term performance of the Canadian economy and stickiness in core inflation point to a necessary tightening to begin to restrain price growth.  The Bank of Canada has the sole mandate of achieving its 2% inflation target and conducts its policy through that exclusive prism. The Bank may not hike at each meeting and might “pause” on increases if near-term financial conditions warrant. The emphasis on global conditions in today’s communiqué is no accident and, after the rocky last couple of years, policy-makers are keenly aware that Canada is not an island. Barring unforeseen shocks in global financial markets, based on our outlook for economic growth and inflation, we anticipate a sequence of 25 basis point increases at subsequent announcements, with the overnight rate at a still-stimulative 1.50% by year’s end.”

Stewart Hall, HSBC Securities (Canada)

“For today, markets and economist alike get uncertainty. For market participants that had been pricing towards a view to a steady diet of 25bp rate hikes throughout the rest of 2010, there is some likely disappointment here. Instead of a clear expression of its interest to steadily march the overnight target higher, the language out of the BoC is more cautious, in keeping with the potential for a flatter rate escalation ladder for the BoC than was expected or forecast. There is hesitancy here in today’s post meeting statement in keeping with the sovereign event risk in Europe and the potential for global capital markets to transmit this event across the Atlantic. With a quarter point rate hike and overnight rate target moving from 0.25% to 0.50%, the BoC is really not tightening policy so much as merely lessening the torrent of stimulus that continues to hit the economy and encourage continued consumer spending and leverage.”

Michael Taylor, Lombard Street Research

“Today’s 25bps interest rate hike to 0.5% from the Bank of Canada was widely expected, especially after yesterday’s strong Q1 GDP data. But the pace of future tightening will be modest, given that growth is likely to slow later this year amid continued spare capacity. A strong exchange rate is also a disinflationary influence.”

Stéfane Marion, National Bank Financial

“The strength of economic reports coming out of Canada left the Bank of Canada with no other choice but to raise rates. With Canada about to move from the recovery to the expansion phase of the economic cycle, it would have been ill-advised for our central bank to dismiss this evidence and keep rates at emergency levels. At the same time, we cannot help but to detect a certain lack of conviction from Mr. Carney. We find the press release to be very heavy on downside risks coming from Europe. We recognize that a sovereign debt crisis cannot be taken lightly. At the same time, force is to admit that negative impact on credit markets elsewhere around the world has not been large enough to jeopardize the global economic recovery. Moreover, Canadian fundamentals strongly argue for a “made in Canada” monetary policy at this juncture to avoid an overheating in interest rate sensitive sectors.

Unless financial conditions deteriorate markedly, we continue to think that interest rates in Canada will need to be raised above 2% over the next twelve months. This morning’s press release shows that the proverbial horse is coming out of the barn, but in a somewhat timid fashion. Nonetheless, we think it is out for good.”

Doug Porter, BMO Capital Markets

“With the consensus and the markets generally expecting the move, almost as important was the tone of the press release: overall, the statement was unambiguously on the dovish side of expectations, with the Bank almost bending over backward to indicate that this is not necessarily the start of a relentless campaign to crank rates higher. Europe came up a number of times in the press release, as did the need for a more balanced global and domestic recovery. The watchword in the Statement was caution. Bottom Line: While the Bank has taken the first step to tighten policy, it is an incredibly tentative step. The Bank has left its options wide open even on the July rate decision; while we still expect a follow-up rate hike at that time, we continue to believe that the Bank will take a pause at some point this year, particularly with the Fed likely on hold until 2011.”

Brian Bethune and Arlene Kish, IHS Global Insight

“…at the end of the press release the Bank made an important change in its guidance to the markets on future policy – stating “given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against the domestic and global economic developments.

…while the Bank of Canada made a technical adjustment to short-term borrowing rates, it sent a clear message to the markets today that a monetary tightening program is not on the table in the near-term future. The good news is that the Canadian dollar has retreated from a severely overvalued level and there has been some peeling back of recent upward pressure on benchmark government term borrowing rates.”

Dawn Desjardins, RBC Economics

“While the global environment presents risks to Canada’s economic outlook, the strength in the domestic economy and a core inflation rate that is only marginally below the 2% target took precedence in today’s rate decision. Furthermore, the statement indicates that the strength of the domestic economy will see the Bank continue to reduce the amount of stimulus, although the statement did not provide clear guidance about the pace of interest rate increases as policymakers watch international events play out. So far, the Bank assesses that the impact of external events on Canada’s economy have ‘been limited”’.  We expect the Bank will raise the policy rate to 1.5% in 2010 and that the tightening will continue in 2011 as the Bank gets the policy rate closer to neutral by the time Canada’s output gap is eliminated.”

Thor Koeppl, Queen’s University

“The Bank of Canada should raise its interest rates and do it in a  gradual fashion. But I am a bit puzzled that the bank underplayed the domestic numbers and overemphasized the European financial crisis.”

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