Due On Wednesday 25th October 2017 At 15:00 BST, 10:00 EDT, 09:00 CDT

The majority expects the BoC to stand pat when it issues its monetary policy decision on Wednesday, with only two of the 31 surveyed looking for a 25bps hike, following back-to-back 25bps hikes, which have left the BoC’s policy rate sitting at 1.00%.

There are several key points supporting the argument that rates will be kept on hold: -

• The 50bps of cuts implemented in 2015 have now been unwound, and the Bank now needs time to assess the impact of its recent hikes and the impact of a stronger CAD
• NAFTA risks appear to be rising
• New macroprudential measures are due to be implemented on housing in January 2018
• An apparent moderation in economic data
• More measured BoC rhetoric in recent public addresses

Market pricing of an October hike has eased alongside the above developments, now pricing around a 25% chance of further tightening at the upcoming decision.

The paring back of expectations roughly coincides with a speech made by BoC Deputy Governor Timothy Lane on 18th September, in which he underscored the importance of the Canadian economy’s sensitivity to the recent tightening and a stronger CAD.

Lane’s address was followed by Governor Stephen Poloz’s late September ‘data dependence’ speech, which also focused on the impact of CAD strength, but this time he lent towards its effects on inflation. Although, in a more recent address Poloz downplayed worries surrounding sluggish inflation, as he noted that “at this stage of the cycle [inflation] is pushed out further, and that’s a good thing.”

This reinforces the idea that his data dependant stance focuses on the output gap, and the same address saw the Governor caution that Canadian growth is set to moderate in H217.

With focus on the output gap, the wording around the measure will come under scrutiny. July’s MPR suggested that the output gap is set to close around the end of 2017, with economic performance since then giving scope for this to be pushed out, although expect the Bank to play on the data-dependant nature of any such adjustment.

The decision will be accompanied by the quarterly Monetary Policy Review (MPR), with the key projections from July’s Review available below.

With the aforementioned moderation in Q3 economic activity - which some argue was to be expected after a hot H1 2017 - the latest BoC Business Outlook Survey conveyed a slightly less upbeat message (on balance). It is also worth remembering that the MPR’s growth estimate for 2017 is likely to experience some tweaks as Q2 GDP exceeded all expectations (analysts are now looking for 3.0% GDP growth in 2017).

Inflation (as measured by an average of the 3 core measures) has edged higher, although the stronger CAD (a product of the BoC’s back-to-back hikes) could create inflationary headwinds moving forward (if it persists), and with the core measures still shy of the elusive 2.0% level, this could prove to be problematic over the longer run. Although the labour market has continued to tighten, moving closer to estimates of full employment, and wage growth ticking up in recent months, boding well for price pressures.

Looking ahead, the economic ‘slowdown’ in recent months, alongside the BoC’s moderation in tone, has led to a slight easing in rate hike expectations, although many are still looking for a hike at the December meeting, with markets pricing a circa 60% chance of a 25bps hike by year end at the time of writing.

What The Bank Desks Are Saying: -

BMO: The decision comes with much less uncertainty than in September. We are expecting the BoC to keep policy rates steady, but there remains a trace of doubt in the market’s mind due to past surprises. Since September’s move, we’ve heard a markedly more cautious tone from policymakers. While the Bank of Canada is clearly data dependent, we anticipate that caution will be very prevalent in the policy statement, Monetary Policy Report and press conference. The statement will likely highlight that domestic growth momentum is slowing as expected, while the “syncspanonous” global expansion continues, consistent with the recent data. Look for the section on inflation to note the pick-up in core measures, while noting that the recent sharp appreciation of the Canadian dollar could act as a dampener over the next year. With OSFI’s new mortgage rules starting on January 1, 2018, expect the statement to reiterate expectations for housing to cool, with some chance of a near-term pick-up ahead of implementation. Previously, the BoC has said they won’t let the uncertainty surrounding trade drive policy; but, given the recent softening of the data, this risk could be a bit more prevalent than in prior statements. One big question is when the output gap will close. The July MPR said around year end, and growth massively outperformed since then, suggesting the output gap would close sooner. However, Poloz highlighted that investment tends to boost potential growth; and, given that investment has been better than expected this year, their view on this may be tweaked. We anticipate the tone around the output gap and potential growth to be cautious as well leaving room for flexibility, reinforcing the view that the Bank isn’t in a hurry to tighten again, but will go with the data flow.

CIBC: Some complain that the central bank doesn’t provide the kind of pinpoint guidance that the Fed attempts in its “dot plots” of future interest rate projections. But we’re at precisely the kind of economic juncture at which to do so would make little sense. That’s why the Bank will leave rates on hold, and will repeat its recent pledge to “monitor” how the economy is doing before making its next move. Core inflation readings are still enough below target, having been there for some time, that there’s no reason to panic about an inflationary overheating just yet. What the Bank of Canada and investors have to judge, is the degree to which the economy might slow without further interest rate medicine. Then there are the mysteries that are not unique to Canada about whether the old rules on how growth and inflation are linked are still valid. So, the only logical conclusion is that the Bank of Canada will simply have to wait and see whether growth and inflation trends compel a further tightening.

Citi: While the Bank of Canada’s outlook survey dipped tspanough Q3, much of the upswing post oil shock has held. Diving deeper into the data, indicators of slack and future output prices have been resilient. Given the lag inflation has had with such measures, the BoC should maintain some confidence in CPI trending higher, keeping future hikes alive. assessments. Policymakers have uncertainty around the degree to which FX will restrain activity and present more persistent inflation adjustments. By the time we reach the December 6th policy meeting, we will have had two further jobs reports and GDP prints as well as another look at prices after this week’s release. These releases should begin to offer an initial assessment on the strength of tightening so far. The fourth round of NAFTA talks led a tougher tone, but a conclusion to these negotiations looks quite far into the future. The worst scenario, which is highly unlikely to happen, is the termination of NAFTA. Given the biggest import exposure to China, the withdrawal of NAFTA could not effectively absorb US trade deficits but could possibly revert all sides to standard WTO tariff, dampening imports and exports.

HSBC: After rate hikes in both July and September, we expect the Bank of Canada to leave its policy rate unchanged at 1.0%. In a speech in late September, Bank of Canada Governor Poloz said that there is "no predetermined path" for rate hikes, that monetary policy decisions will be data dependent, and that the Bank will "feel our way cautiously". As well, the recent Business Outlook Survey showed that corporate optimism declined modestly from robust summer readings. In our view, these developments decrease the urgency to raise rates again following rate hikes at consecutive meetings in July and September. The market has only a 24% probability of a rate hike priced in for next week.

National Bank: With growth set to soften in the second half of 2017, after clocking in at 3.7% in Q1 and 4.5% in Q2, it was not surprising that the latest Bank of Canada Business Outlook Survey conveyed a less upbeat message compared with last summer. The slightly less optimistic outlook should give the Bank some leeway to pause its normalization of monetary policy on October 25th. That said, current economic conditions do not justify maintaining the inflation adjusted overnight rate in negative territory either. More rate hikes are in the offing assuming growth remains above potential in the coming quarters. Our call is that the BoC will tighten policy once more this year, at its December meeting.

RBC: We expect the BoC to leave the overnight rate unchanged at 1.00% after 25bp hikes in each of their last two rate meetings. Growth has certainly slowed in Q3, but remains on pace for the above-potential 2.0% annualized rise seen in the July MPR. Governor Poloz said the central bank was “particularly data dependent” in a key September 27th speech and implied some remaining excess capacity in the economy, especially the labour market. The evolution of prices has been positive of late, including a rise in the average of the BoC’s tspanee core inflation measures to 1.53% and average hourly earnings rising 2.2% y/y in September (highest in over a year), though growth may prove more determinant for the BoC near-term. With this in mind, adjustments on the growth outlook, specifically regarding consumption and housing, should provide some insights into how the Bank sees the economy reacting to the earlier hikes given elevated household debt and house prices.

Scotiabank: While we continue to forecast a hike in December, we have reduced confidence in such expectations. The risk of NAFTA negotiations becoming a macro event that lessens growth prospects has gone up appreciably of late from original expectations that negotiations would have been somewhat smoother. Indeed, it is conceivable that one cannot set the bar high enough for further Bank of Canada rate hikes by way of the central bank’s stated data dependence. What looms over data dependency - that by definition is a scorecard on the economy that was - is the state of NAFTA negotiations - which affects the economy of tomorrow. Governor Poloz has emphasized the near impossibility of estimating a potential NAFTA shock but this alone reaffirms that a high degree of uncertainty exists and that counsels a potentially protracted period of cautious policy guidance. We are not sure how one can have much confidence in extrapolating investment gains that could raise the economy’s noninflationary speed limit or “potential” GDP growth, but expect such a move by the BoC. Doing so would push out concerns about tripping into material excess aggregate demand and connote greater policy flexibility while NAFTA negotiations are being evaluated and it would be a neutral/dovish.

TD Securities: We expect the Bank of Canada to stay on hold next week but the messaging tone is the biggest wild card. While recent data suggest GDP growth has cooled in the third quarter, core inflation and wage growth have picked up, which warrants at the very least a modestly hawkish tone. However, given recent comments there is a risk that the Bank may disappoint and deliver a neutral to dovish tone. Since the July hike, there has been little evidence of a cooling in consumer demand for housing or big-ticket items, which continue to remain well supported by a combination of low interest rates, a strong labour market and broadly supportive asset valuations. We continue to expect a hike in December.