Welcome to Prattle’s “Macro Minutes.” Each week, we analyze the most important communications from a specific region and provide insight based on our quantitative analysis of central banks.
Despite the Canadian economy looking its best since before the 2008 financial crisis, the Bank of Canada (BOC) is playing it cool.
Analysts have interpreted many of the bank’s recent communications as dovish, but Prattle’s algorithm has provided a different perspective, scoring them as hawkish instead.
After announcing at the BOC’s Monetary Policy Report press conference this week that the bank would hold rates at 0.5%, Governor Stephen Poloz pessimistically said during his speech that “the global economy retains the capacity to disappoint further”–a statement that many analysts interpreted as dovish.
Giving off the impression that the BOC was exercising a cautious outlook due to increasingly complex situations both at home and overseas, Poloz also noted that “the complex adjustment to lower terms of trade will restrain Canada’s growth over much of our forecast horizon,” and “the collapse in investment in the commodity sector will mean a slowdown in the economy’s potential growth rate.”
After the bank cut rates in January and July of last year, this announcement from the BOC mirrors the Fed’s recent decisions to hold rates amidst speculation of a pending rate hike later in the year.
Some analysts interpreted Poloz’s negativity as a strategy to dampen growth in the Canadian currency (the loonie), which has surged 15 percent since early last fall. Further currency growth could stall the economic recovery that has been taking place in the country since the financial crisis.
Regardless of the media’s interpretation, the Canadian stock market rose to a five-month high following the dovish-sounding announcement, presumably under the assumption that the negative economic factors highlighted in Poloz’s speech would prevent the loonie from continued rapid growth.
Prattle’s assessment of the bank’s recent communications tells a different story though.
Despite Poloz’s dovish-sounding comments and the markets’ corresponding reaction, our algorithm gave all communications from the bank this week, including Poloz’s speech, an average score of 1.07, revealing a hawkish institution rather than a dovish one. The BOC’s (likely) attempt to use dovish language to curb the loonie seems to have convinced most audiences, but the bank’s actual optimism was evident in the text.
With the BOC announcing a 1.7 percent expected GDP growth rate this year compared with its estimate of a 1.4 percent growth rate in January, it is easy to see why the bank would have a hawkish mood toward the economy despite continuing steep investment drops in the oil sector. However, after making promises that a full rebound from the financial crisis is still at least two years away, the bank’s top priority is to maintain stability and encourage a slow, gradual recovery.
The bottom line: we expect to see continuing hawkish sentiment out of Canada as their economy slowly recovers from the financial crisis.
The Prattle Team