Canada: No rush to tighten further - Nomura

In view of Peter Dragicevich, Research Analyst at Nomura, Canada’s growth is slowing to a more sustainable pace and expect the Bank of Canada (BoC) to next hike interest rates in April 2018.   

Key Quotes

“Activity:

• Economic growth momentum in Canada looks to have lost some steam in Q3, but this is not overly surprising given the run of above-trend growth over the past year. A natural moderation to a more sustainable pace was, in our view, inevitable. This slowing should continue over coming quarters, given the economy is now operating at close to capacity and with monetary conditions less stimulative considering the 50bp of BoC interest rate hikes delivered over Q3 2017 and the higher CAD. That said, we do not expect a sharp deceleration.
• Various indicators and developments continue to show that growth is self-sustaining and remains broadly based, but there are push-pull elements to consider. For example, the strength of the labour market and the acceleration in wage growth should help underpin household consumption. However, elevated household debt levels and higher interest rates are likely to work in the opposite direction. Likewise, although housing activity is slowing, survey measures and the lift in oil prices point to non-residential capital expenditures picking up. Moreover, the robust global growth backdrop should help negate the impact on net exports from the stronger CAD. Overall, we maintain our view that the output gap is on track to turn progressively more positive over 2018.”     

“Inflation: While annual growth across the suite of core CPI measures is low, it does appear that we are past the low point. The reduction in labour market slack and the positive output gap are indicative of an acceleration of underlying inflation over the forecast horizon. However, global structural forces and CAD appreciation should have a dampening impact. We only foresee a gradual rise in core CPI inflation over 2018/19.” 

“Policy: Following back-to-back rate hikes in July and September, the BoC was more cautious on its outlook at the October meeting. The BoC continues to emphasise its data-dependency but, based on the banks preoccupation with the downside risks to inflation and uncertainty stemming from the NAFTA renegotiations, we have pushed out the timing for when we think the next rate hike could take place to April 2018. This more elongated and watchful approach has always been a part how we view the BoC’s rate hiking cycle, given high household debt levels and external uncertainties.” 

“Risks: The renegotiation of NAFTA, a sharp decline in Canadian house prices and the large domestic imbalances are downside risks. By contrast, a further rise in oil prices and/or stronger-than-anticipated global or US growth are upside risks.”