Andrew Kelvin, a strategist at TD Securities, notes that the Bank of Canada is emphasizing the risks of a growth slowdown and appears prepared to ignore the inflation shock caused by rising energy prices. While markets favor a rate hike, the bank's statements and Canada's GDP gap suggest that monetary tightening will be difficult to achieve. TD believes that current rates are not consistent with a balanced view of the Bank of Canada's policy.

 

The dovish tone contradicts the narrative of increased savings

"The Bank of Canada's March statement strongly emphasized the downside risks to the economy amid ongoing trade uncertainty and heightened geopolitical uncertainty."

"For our part, we believe the Bank of Canada may be slightly over-interpreting recent economic data (we are not far from adding 180,000 jobs from September to November) – but it is worth noting that the latest inflation readings showed a significant slowdown in underlying indicators."

"Canada is as well-positioned as any country to handle an inflation spike, and the Bank of Canada has indicated its readiness to weather the shock in the near term."

"Clearly, there is a certain level of WTI crude that would prompt the Bank of Canada to take action, but with a production gap of nearly 1% at the start of the year, that is a very high bar."

"In short, we don't believe the Bank of Canada is overly concerned about the inflation woes in the UK or the Eurozone."