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Poloz Dampens Rate Hike Expectations
Expectations of an October BOC rate hike have fallen sharply in response to BOC governor Poloz’s speech last week. Poloz expanded on the themes discussed during the September 6th policy meeting and echoed comments made recently by BOC Dep. Governor Lane.
The Canadian Dollar is now down nearly 200 pips since BOC governor Poloz’s speech last week where he specifically highlighted recent CAD strength and its negative impact on inflation. The governor also reiterated the BOC’s message that the rate path is not pre-determined and that considerable uncertainty clouds the outlook.
BOC Looking to Moderate Market Response
The BOC has been quite careful to highlight that their rate setting is not on a mechanical path and that there is still plenty of discussion and debate around the rate path. This cautious approach is appropriate given the remaining uncertainty in the bank’s outlook around elements such as the evolution of economic capacity, the disinflationary impact of technology, low wage growth and the heightened sensitivity of the economy’s response to interest rate increases given the high level of household debt.
Despite the downward reaction in CAD, the tone of the governor’s message remained constructive overall as he highlighted the completion of the economic adjustment to the oil price shock as well as the closure of the output gap. However, the governor’s caution is clearly part of the BOC’s efforts to moderate the aggressive market response to BOC tightening which has seen a sharp increase in rate hike pricing.
Prior to the speech, OIS had been pricing around one further hike into year end with another by early March 2018. Pricing has now fallen by around 20% for a rate hike into the year end and by around 44% for a rate hike by March 2018. Yield spreads have also been negatively affected, narrowing around 7% on the 2-year curve, on top of the large spread compression which was seen in response to governor Lane’s comments earlier last month.
