Market Mover - BNP PARIBAS - Investment Services India

Low for longAs a result of the aforementioned risks and generalweakness in the domestic economy, expectations forCanadian growth were revised down 0.7pp for both2011 and 2012 to 2.1% and 1.9%, respectively.Meanwhile, the BoC’s growth forecast for 2013 wasrevised up to 2.9% from 2.1% previously. Thisimplies a very slow closing of the output gap with theeconomy not expected to return to full capacity untilthe end of 2013 (see Chart 1).The downward revision to the growth outlook alsoprompted downward revisions to the inflation outlook.Core inflation is projected to be “slightly softer thanpreviously expected, declining through 2012 beforereturning to 2 percent by the end of 2013”. Headlineinflation “is expected to trough around 1 percent bythe middle of 2012 before rising with core inflation tothe two percent target by the end of 2013”. Weinterpret the lowering of growth and inflationexpectations to mean that the overnight rate willlikely remain at low levels for some time.Leaving the door open for cutsAfter lowering their expectations, the BoC nowjudges risks to their forecast to be roughly balanced.However, the overall tone of the Policy Statementwas dovish. In particular, the BoC removed the line“some of the considerable monetary policy stimuluswill be eventually withdrawn”.With regard to the policy outlook, there are two likelyscenarios: i/ the global and Canadian economiesgrow in line with the BOC’s current expectations—and thus the Bank would be expected to remain onhold until at least mid-2013; or ii/ the global andCanadian economies grow more slowly than currentBoC expectations (including a US recession)—inwhich case, we would see policy easing in the nearterm, and rates would remain on hold until at leastmid-2013. Of the two, we think the latter is morelikely.We expect that a rate cut would come in early 2012on the back of the implementation of QE3 in the USand have, therefore, moved back our call for the BoCto cut rates from December 2011 to early 2012 onthe back of a delay in our expectations for theimplementation of QE3 and an upward revision to oursecond half of 2011 US growth outlook. In addition,we have pushed back our expectations for theremoval of policy accommodation until mid-2013.Changing the mandateImportantly, the BoC focused a large portion of thestatement on financial market risks. We think there isa good chance that this will become an explicitcomponent of the upcoming changes to their officialmandate. In addition, we could see a move towardtargeting core inflation versus the current mandate oftargeting headline inflation. Both of these outcomeswould give the BoC more wiggle room at times wheninflationary pressures are deemed to be temporary.Bricklin Dwyer 27 October 2011Market Mover13www.GlobalMarkets.bnpparibas.com