The Canadian Central Bank remains circumspect!
Earlier last week with remarks by Trump that USD is too strong, and with rising oil prices appreciated the loonie to a 6 week high @ 75.5 US cents. Both key data releases, of manufacturing and residential, exhibited better than expected activity during the commencement of the year. Manufacturing sales was above expectations as volume rose by 0.1%
With tightening tendency expected from the Federal Reserves in the hike of the federal fund rate, there was an expectation for the Bank of Canada to take a more hawkish approach, given the improved performance of the economy. However, the central bank has been rather cautious and not tempered with the interest rate for now. With the overnight rate left unchanged at 0.5%, the central bank has upgraded its forecast for this year from 2.1% to 2.6%. Accordingly, the bank expects the output gap to reduce during the 1st half of 2018. Even though the macroeconomic numbers are uplifting, the Central Bank is being very circumspect, citing ‘material slack,’ uneven export growth and business investment challenges as not overly convincing. They are also of the view that consumer spending and residential investment are transient improvements and this data would have to become much more consistent in nature to start relying on. Obviously, the cautious approach emanates from the developments from across the border whereby the US trade policy has been crying for protectionism. This could adversely affect Canadian not so consistent productivity numbers. Canadian exports are bound to shudder on the prospects of border adjustment tax targeting Canadian goods. Lobbyist
the border whereby the US trade policy has been crying for protectionism. This could adversely affect Canadian not so consistent productivity numbers. Canadian exports are bound to shudder on the prospects of border adjustment tax targeting Canadian goods. Lobbyist are vying to protect trade relationship under the NAFTA, which Donald Trump would like to address in an aim to protect US jobs.
Obviously, the need of the day would be for Canadian businesses to diversify beyond United States, and see that as an eye opening opportunity in order to avert any long-term issues related to productivity rates, which certainly have not been superlative; which is rather a point of concern. The Bank is also wary of the fact that the Canadian economy has endured false starts in recent years. While it is a forecast that the economy would continue to chug at ~2.5% during the remainder of the year, more and more economic slack would need to be absorbed before the Central bank can think of raising rates as early as 2018 which may also strengthen the loonie in the long run.