In view of Benjamin Reitzes, Canadian Rates & Macro Strategist at BMO Capital Markets, last week’s Bank of Canada policy statement was a bit more dovish than expected.

Key Quotes

“The blowout November jobs report drove some expectation that the Bank might sound a bit more hawkish, but they did not deliver. Indeed, the statement noted that there’s still slack in the labour market, even if it’s diminishing. Historically, the jobless rate at 5.9% and wages accelerating was a sign that there isn’t much, if any, slack in the labour market. However, the BoC has recently focused on their Labour Market Indicator (LMI) which is still showing room to run on the jobs front. In addition, the statement repeated that policymakers will be “cautious” in raising rates.”

“While the market focus was on those two points, the rest of the statement was generally upbeat. The discussion of the global economy was positive, though uncertainties around trade and geopolitics were noted. On the domestic economy, the language was nearly all upbeat. The only negative point was that exports were quite weak in Q3, though a rebound is expected in Q4. It was also noted that “housing has continued to moderate, as expected” but that’s likely a positive as there were earlier concerns of overheating. Even the inflation section was encouraging, with the move higher in core CPI “reflecting the continued absorption of economic slack.”

“While the market interpreted the statement as dovish, cutting the odds of a January hike, it’s unlikely that Governor Poloz (who does not believe in forward guidance) would want to entirely shut the door to a move at the next meeting. What if the jobless rate falls again next month and wages pick up further? That would strongly suggest that the slack noted in the statement is diminishing in an awful hurry, putting the BoC in a bit of a bind if January is talked down too far. We’ll hear from Governor Poloz this week. Look for him to remain cautious given the uncertainties, but in no way more dovish than the statement.”

“Key Takeaway: Last week’s policy statement was relatively upbeat even as the market focused on the more cautious aspects. While a January hike looks unlikely at present, the BoC hasn’t shut the door entirely; expect Governor Poloz’s speech next week to reflect as much. Given the positive aspects of the statement, we remain comfortable with our call for the next rate hike to come in March.”