OTTAWA — If the idea was to stump the markets on what's ahead for the Bank of Canada, then governor Mark Carney succeeded Wednesday with a rate statement that gave both hawks and doves something to gnaw on.
The central bank raised its benchmark rate by another 25 basis points to one per cent. Some felt it might leave rates unchanged, given the shoddy U.S. economic data of late and evidence of a slowdown in Canada.
The country's major commercial banks quickly followed suit, also raising their prime lending rates by a quarter-point to three per cent.
What happens next is anybody's guess, as the accompanying statement provided little direct guidance. It was, according to economists at Laurentian Bank Securities, "deliberately ambiguous," as it highlighted slower growth and exceptionally easy credit conditions in almost the same breath.
Economists' interpretations of the central bank's statement were all over the map, with some suggesting it signalled a long pause ahead. Others, however, warned of another rate hike as soon as October.
The majority of analysts surveyed by Reuters think rates will remain on hold for the rest of this year.
"Mr. Carney wants to maintain maximum flexibility, so he's not promising anything," said Mark Chandler, head of fixed-income and currency strategy at RBC Capital Markets in Toronto.
Avery Shenfeld, chief economist at CIBC World Markets, said the central bank's statement reflects uncertainty among the bank's key policy-makers.
"It is evidence that the bank doesn't know what it is going to do, so it drafted a statement that lets them go either way."
The central bank might want to wait for further data on the U.S. economy before tipping its hand further. In the latest indicator, released Wednesday, the U.S. Federal Reserve said in its Beige Book survey that economic activity showed "widespread signs of a deceleration" in mid-July through the end of August.
The Bank of Canada's statement said Canada's economic recovery would be "slightly more gradual" than envisioned it its last economic outlook, due to a "muted" U.S. economy.
But it said domestic demand was expected to be "solid" and business investment to advance "strongly," both powered by "accommodative" credit conditions.
"What he is signalling is that there's a downgrade of growth coming up," Chandler said. "But he's also saying, 'Don't get carried away, because the central bank's forecast really hasn't changed that much, and the forecast entails higher rates.' "
The central bank made a specific reference to bond yields. Yields have dropped steeply since the onset of rate hikes, in essence offsetting attempts by the Bank of Canada to tighten the money supply. The central bank said as much in the statement, noting financial conditions have "tightened modestly but remain exceptionally stimulative" in Canada.
Banks source their funds from the bond markets and yields have dropped as markets have priced in slower global growth. This explains why mortgage rates have declined in recent weeks even though the Bank of Canada has raised rates. Meanwhile, variable-rate products will become more expensive as these loans are tied to lenders' prime rate, which went up Wednesday in concert with the Bank of Canada benchmark.
Douglas Porter, deputy chief economist at BMO Capital Markets, said the statement signalled it would take a deeper economic slowdown than witnessed to date "to prompt the central bank to stop raising rates."
Conversely, other analysts keyed in on a reference to "unusual uncertainty" surrounding the outlook, in the statement's final sentence.
"This appears to indicate the bank's intention to pause the process of rate normalization. Moreover, the language suggests the bank may pause longer than merely the next meeting or two," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.
Sebastien Lavoie of Laurentian Bank Securities said the Bank of Canada's ambiguity contrasts with the recent guidance provided by the Reserve Bank of Australia and Sweden's Riskbank — two other inflation-targeting central banks. Australia said rate hikes were done for now, whereas Sweden said further increase were in the cards.
"We cannot brush aside hikes this upcoming fall or by next spring so easily," Lavoie said. "This would be too inflexible and a stark deviation from the manoeuvrability the central bank has left itself."
The Financial Post