Despite dovish data, BoC could move in 2017

Canadian economics data to be released this week could prove dovish, despite coming hot on the heels of last week’s more hawkish tone from the Bank of Canada.

Read: BoC talk takes hawkish turn, loonie rises

Retail sales (Thursday) and CPI updates (Friday) will significantly inform two key issues for Canada’s forecast, says Derek Holt, vice-president and head of capital markets economics at Scotiabank, in a weekly economics report. Those issues are whether consumers remain resilient and whether inflation continues to fall.

Thursday’s retail sales are for April.

“A decline in volumes of new cars and trucks sold, combined with a high jumping off point from the prior month, are expected to weigh on the headline dollar value of total retail sales more than the modest upside from gasoline prices that were higher in May over April,” says Holt.

The seasonally adjusted volume of new car and truck sales fell by about 8% month-over-month in April.

Overall, Holt says retail sales “could be a headwind for monthly GDP.”

Read: Is Canada’s economy set to surge? Here are banks’ forecasts

Friday’s CPI update is for May — a soft month for gas prices.

“Gasoline prices dropped an unusually large 1.8% in the month, possibly limiting the monthly headline price increase to 0.3%,” says National Bank in a weekly economics report. “Based on that scenario, the annual inflation rate could drop one tick to 1.5%.”

But, beyond gas prices, “It’s what lurks beneath that will matter the most in CPI,” says Holt. “And on that, the issue is whether the declines in core CPI measures are continuing in May data.”

National Bank expects inflation to “gain a bit of traction” in light of recent economic momentum. “Accordingly, CPI-common should rise on tick to 1.4% on year-on-year basis in May.”

When the Bank will make its move

Referring to last Monday’s speech by Carolyn Wilkins, Bank of Canada’s senior deputy governor, National Bank adds: “Even if inflation were to remain below the central bank’s target, she seemed inclined toward a more hawkish approach, suggesting that policy-makers not only had to focus on current economic conditions, they also had to ‘anticipate the road ahead.’ ”

Based on her remarks, National Bank expects the bank to raise the overnight rate by 25 basis points in October, three months sooner than previously assumed.

Putting Canada’s current situation in historical context, Benjamin Tal, deputy chief economist at CIBC World Markets, says in a weekly economics report, “Every economic recession in the post-war era was helped, if not caused, by a monetary policy error in which central bankers sat on low interest rates for too long, only to raise them too rapidly and too aggressively to combat sneaking inflation.”

He reminds that the “magic of monetary policy works with a lag, so any negative impact on economic activity [from a rate hike] will be largely offset by the wave of infrastructure spending that is expected to reach a peak in 2018.”

He, too, forecasts the Bank’s first hike will occur in October 2017.

“And we suspect that there might be some more juice left yet in the short-end of the curve play.”

Read the full reports from Scotiabank, National Bank and CIBC.

Also read:

Waiting game for central banks—even the Fed