Bank of Canada: no change

The strong employment data released last week led some market participants to think that the Bank of Canada might tighten policy further at its Governing Council meeting this week.  However, the consensus expectation was for no change, and today the Bank confirmed that it will be keeping its overnight rate target at 1 percent.

The press release notes that developments in the economy since the Bank's previous meeting in October have been broadly in line with expectations.  Growth has begun to moderate from the rapid pace seen in the first half of the year.  However, it is striking to note how much of the release is devoted to developments that could lead the Bank to tighten policy again before too much longer: strong employment gains, rising wages and an upward creep in inflation, both headline CPI and the Bank's favoured "core" measures.

The market is currently pricing in no more that a one-in-three probability of a rate hike at the Bank's next policy meeting, set for January 17.  If the economic data, particularly regarding employment and wages, remain as strong as they have been recently, a rate move at that meeting or at least by the end of Q1 seems much more likely than not.

That said, there are at least two wild cards that the Bank will have to take into account.  First:  new mortgage "stress tests" will be introduced in the new year, applicable to non-insured mortgages. Studies suggest that as many as one in five mortgagees could fall short of the new tests, a number that would only be increased by further monetary tightening.  Second: NAFTA.  The "drop dead" date for the talks has been pushed back to March from the end of this year, but there are plenty of indications that the negotiations are not going well.  The negative impact on Canada of a US withdrawal from NAFTA is debatable, but the Bank of Canada would surely want to avoid making a bad situation worse with an ill-timed rate move. These wild cards are likely the main reason that the market is not more confident about a rate hike in January.