Bank of Montreal are expecting a rate hike at the BoC policy meeting today (17 January 2018)

(bolding mine)

Following back-to-back blowout employment reports and a solid Business Outlook Survey, the Bank of Canada is expected to hike rates 25 bps at the January 17 meeting.

  • Governor Poloz has consistently said that markets should look to the data for guidance on the direction for policy, and a jobless rate at the lowest level in at least 41 years, and generally upbeat sentiment point strongly toward a January rate hike.
  • For those concerned about the caution points, Mr. Poloz has noted in recent months that markets pay too much attention to the minutiae of his words and the data should matter more.

Even so, this decision isn't entirely clear cut.

  • One of the key takeaways from the October MPR was that the output gap had essentially closed after the strong run of GDP growth through 2017 Q3.
  • Accordingly, Governor Poloz leaned on slack in the labour market as a rationale for a continued patient policy stance. Over the past few months, labour markets have tightened significantly, leaving the BoC little reason to remain on the sidelines from this perspective. Job growth was 2.4% y/y in December, the best since 2007, the jobless rate is at a multi-decade low 5.7% and youth unemployment (a Poloz pet peeve) is close to a record low.
  • That's the good news. But, if you're looking for reasons in the data for the BoC to take a pass, there are a few. Wages continue to be on the soft side, up just 2.7% y/y. Our estimate of the BoC's Labour Market Indicator (LMI) is still about 0.5 ppts from the lows hit in 2007, suggesting some slack remains. Notably though, the LMI has improved sharply over the past few months, consistent with the improvement in most of the labour market data.

Look for the MPR to highlight the LMI slack in an attempt to contain expectations for future hikes.

  • And, international trade remains a soft spot, though this alone is hardly a reason to stay on hold.
  • Beyond the data, and perhaps most importantly, the uncertainties around NAFTA, household debt, and new mortgage rules are big potential negatives for the outlook. While the BoC has said they will not allow uncertainties to paralyze policymaking, we'll see if their actions match their words.
  • This week's NAFTA headlines about higher odds of a U.S. exit might have sparked increased concern at the BoC, perhaps prompting at least some second thoughts before hiking.

The MPR forecasts will see some modest tweaking,

  • with 2017Q4 GDP growth likely trimmed to between 1.5% and 2%,
  • which, in turn, will cut 2017 to 3%.
  • Look for Q1 to get introduced at around 2%.
  • The CPI projections have taken on less importance since they only include headline inflation; even so, there could be some upward shift to account for the rise in oil prices.
  • Overall, we're not expecting any forecast changes that would meaningfully impact the policy outlook.

Markets will be watching closely for any signs that the BoC could hike at back-to-back meetings again, but we'd caution investors not to read too much into Poloz's comments (as noted above). The uncertainties previously highlighted by the Bank are still present and likely won't dissipate until the April meeting at the absolute earliest. That should keep the tone of the statement, MPR and press conference relatively cautious despite the anticipated rate hike.


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