BOC Governor Signals July Rate Rise in Play -- 2nd Update
June 28 2017 - 1:19PM
Dow Jones News
By Paul Vieira
Bank of Canada Gov. Stephen Poloz reignited expectations for a
rate increase next month by saying excess slack in the Canadian
economy is now being absorbed "steadily" at the current pace of
growth.
His comments in Portugal, during an interview with CNBC Europe
that aired Wednesday, drove the Canadian dollar to a four-month
high and pushed up yields on government of Canada bonds. The
remarks came as central bankers in Europe and the U.K. also signal
their intent to remove stimulus from their economies.
Mr. Poloz said growth in Canada would decelerate following a
strong 3.7% annualized gain in the first quarter, top among the
Group of Seven leading nations. But he said he doesn't envisage a
dramatic slowdown.
Growth would register at a "more normal pace but still above
potential," he said. "That's the important thing. That means that
we're absorbing excess capacity that was built up in the wake of
the crisis and then built up again in the wake of the oil shock two
years ago."
When pressed on how that would affect the central bank's
policy-rate decision next month, Mr. Poloz said officials "need to
be at least considering that whole situation now that the excess
capacity is being used up steadily."
BMO Capital Markets altered its rate outlook following Mr.
Poloz's comments, and said it expects the central bank to raise its
policy rate, currently at 0.50%, in July. The firm previously
forecast a rate increase in January 2018. It said messaging in
recent weeks indicates the central bank wants to begin unwinding
the rate cuts it delivered in 2015 to help the economy deal with a
sudden drop in commodity prices.
Jimmy Jean, economist at Desjardins Capital Markets, said in an
interview he has a "strong bias" toward a July rate increase,
saying Mr. Poloz didn't mention in his interview any concerns
related to soft inflationary pressure.
"To me it is increasingly hard to square off these comments at
this juncture, with a scenario of a central bank that is just happy
to introduce hawkish language in the next statement and wait
further before hiking," Mr. Jean said.
On the overnight-index swap market, traders Wednesday priced in
a roughly 70% probability of a rate increase July 12, up from a
roughly 40% probability the previous day.
Investors warmed up to the Canadian dollar, pushing the currency
to a four-month high after Mr. Poloz's comments. The loonie was
trading at about 76.59 U.S. cents early Wednesday, from 75.74 U.S.
cents late Tuesday.
Meanwhile, Canadian bond yields rose sharply, with the front end
outperforming the rest of the curve, according to CanDeal. The
yield for Canada's two-year bonds was at 1.017% from 0.964% on
Tuesday, while the 10-year bond was yielding at 1.599% from 1.565%.
Bond yields move inversely to price.
Similar market movement unfolded in the U.K., as the pound
jumped to a three-week high after Bank of England Gov. Mark Carney
said interest rates in the U.K. may need to rise if the economy
keeps growing despite weak consumer spending.
Mr. Poloz and the Bank of Canada's No. 2 official, Carolyn
Wilkins, rattled markets in June with a sea change in commentary
that signaled the bank was laying the groundwork to raise its
benchmark rate.
They both said rate cuts they delivered in 2015 to offset the
negative shock from the commodity-price swoon have worked, with the
economy now growing at a firmer pace and broadening on a sectoral
and regional basis. Ms. Wilkins said it is time to assess whether
rock-bottom rates are still necessary.
Previously, the central bank had urged caution on the Canadian
outlook amid a string of strong economic data, citing uncertainty
in U.S. trade policy as an important concern, and the presence of
spare labor and production capacity.
David George-Cosh contributed to this article.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
June 28, 2017 13:04 ET (17:04 GMT)
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