Canadian stocks higher, loonie lower as Poloz dials back hawkishness

Canadian stocks higher, loonie lower as Poloz dials back hawkishness”

In a speech Wednesday in front of the Chamber of commerce of Saint-Jean, Terre-Neuve-et-Labrador, Stephen Poloz indicated that a number of unknowns and external risks persisted, even if the economy was a the beginning of the year surprisingly strong. Although we are convinced that the economy has made significant progress, we can not know exactly how far from the goal. This month's interest rate hike was nearly almost a complete surprise to the markets and in today's speech, Poloz added that the BoC could be surprised in either direction with regards to inflation, as it is now dependant on so many different factors, and they will continue to feel their way cautiously in the coming months.

"The fact is, nobody really knows", Poloz said in response to a question about where rates could go from here.

The dovish tone sent economists scrambling to revise expectations for the next rate hike, which some had predicted would come as early as October, and the Canadian dollar weakened to a near four-week low as investors bet on a slower pace of tightening.

Other unknowns clouding the outlook for inflation include the impact of the digital economy, which may be placing downward pressure on inflation; ongoing weak wage growth; and the sensitivity of the economy to higher interest rates given elevated levels of household debt.

The speech pointed out that the bank's decisions have become "particularly" data-dependent due to uncertainties such as geopolitical developments and protectionist sentiments in some parts of the world.

"There is no predetermined path for interest rates from here", Poloz said in a speech to the local board of trade in St. John's. Some analysts, taken aback by this second increase in the policy rate, have deplored the silence of the bank in the period of eight weeks between its decisions of July and September.

While growth in the second quarter far exceeded expectations, and showed the expansion becoming more broadly based and self-sustaining, "recent data point clearly to a moderation in the second half of the year", Poloz said.

The next announcement from the central bank about its monetary policy is scheduled for 25 October.

Before the speech, most analysts had been expecting the central bank to raise the benchmark rate a few more times over the coming year.

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