'Next move a cut': What economists say about Bank of Canada's decision to hold rates

“The BoC remains highly data-dependent and won’t hesitate to push interest rates higher if necessary to return inflation to the two per cent target rate. And there are two additional labour market reports and two additional inflation reports before the next scheduled decision in October. But we continue to expect that the recent soft-patch in economic data will continue, and look for the overnight rate to hold where it is through the end of this year.

“Although the BoC has moved back to the sidelines, it doesn’t mean it will let up on its hawkish rhetoric. It needs to make sure that financial conditions remain tight for the economy to continue to slow. Markets are still in the ‘will they, won’t they’ camp, with pricing for another hike around 50 per cnet. Given that the slowdown looks to continue, we think the bar for another hike has been raised.

“That said, we’ll concede that the very near-term inflation outlook isn’t very comforting, and the Bank is undoubtedly going to remain on the defensive. Indeed, rising gas prices and negative base effects put upward pressure on inflation in August and fresh data in two weeks is likely to show the CPI up nearly four percent year-on-year.

“However, inflation pressures probably won’t go unaddressed should they persist or co-exist with an unexpected rebound in other key data points . Importantly, we’ll soon get an update on near-term inflation expectations and “corporate pricing behaviour” in October’s Business Outlook Survey. The Bank has keyed on these “soft” indicators in recent months. Given the weaker growth environment, we’d expect to see improvements here, but small sample size surveys can be difficult to forecast.

Source: Loan Digest (loandigest.net)

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